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TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

People invest in real estate investment trusts to reap rich cash dividends. But

Vornado Realty Trust

(VNO) - Get Vornado Realty Trust Report

shareholders haven't been so lucky lately.

In January, Vornado started paying 40% of its dividend in cash and the rest in stock to shore up its balance sheet. That means investors who previously received 95 cents a share in cash are getting 41.5 cents in cash and 53.5 cents of Vornado stock. The 12% drop in Vornado's stock this year has added to the sting, especially compared with the 2.1% gain of the

S&P 500 Index


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Vornado, whose properties include 50 buildings in New York, has been hit hard by the falling value of commercial real estate. Investors will feel the pinch through a 3% cash dividend yield, which is down from 6.85% in the past year. A return to all-cash payouts is unlikely until real estate prices and occupancy rates improve.

The economic slump has taken its toll on real estate investment trusts, also known as REITs. In addition to falling property values, the industry loaded up with debt in recent years, much of which will need to be paid down or refinanced in the next three years.

REITs are required to pay 90% of their income to shareholders as dividends. Weak earnings have made it difficult for Vornado to keep up with its hefty payout.

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On Wednesday, Vornado said first-quarter earnings dropped 67% to 79 cents a share from $2.38 a year ago. Funds from operations, a key profit gauge for REITs, tumbled to $1.63 from $3.27 in the first quarter.

Vornado's funds from operations peaked at $5.89 in 2007 before falling to $5.16 last year. Analysts expect that amount to slide to $4.46 this year and $4.07 in 2010. That's hardly a solid financial base to support an annual cash payout of $3.80.

Investors looking for dividends might be wise to consider

Equity Residential

(EQR) - Get Equity Residential Report



(HCP) - Get HashiCorp, Inc. Class A Report

instead. They offer dividend yields of at least 8.5%, paid entirely in cash. Their shares are down more than 20% this year, creating a potential buying opportunity.

To be sure, Vornado has been taking steps to bolster its balance sheet. In April, the company sold $710 million in stock and offered to buy back more than $500 million in notes that are due over the next two years. That might position the company to acquire smaller REITs that are struggling with debt.

Those moves could benefit long-term investors who can stomach what amounts to a dividend cut this year. Those who can't might be better off looking elsewhere in the market. Ratings assigns Vornado a grade of C-minus, a "hold" recommendation.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.