An Examination of REIT Dividend Payout Policy

Abstract

This paper proposes a new methodology for decomposing real estate investment trust (REIT) dividends into discretionary and nondiscretionary components. By examining the tax characteristics of dividends, I am able to accurately measure the discretionary component of a REIT's dividend. This methodology provides new insights into our understanding of REIT dividend payout policy. Unlike previous studies that find limited explanations for discretionary dividend payouts, I find a systematic explanation. Discretionary dividends tend to be large on average making up between 18% and 35% of a REIT's total dividend and display considerable variation through time and across firms. The main determinant of these discretionary dividends appears to be dividend smoothing. There is an inverse relationship between discretionary and nondiscretionary dividends. Even if a REIT has excess cash flow it could distribute in discretionary dividends, it will tend not to do so if it has a high dividend payout due to its nondiscretionary dividends. In this sense, REITs appear to use discretionary dividends to smooth their payout ratios.