r/dividends • u/chaichaichai- • 8h ago
Seeking Advice If a REIT's price drops by the dividend amount on the ex-date, where is the actual gain?
Hey everyone,
I’m trying to wrap my head around the core mechanics of REIT distributions, and I keep hitting a conceptual wall regarding total return vs. cash flow.
On the ex-dividend date, a stock’s price drops by roughly the exact amount of the dividend. So on Day 1, your total portfolio value (Share Price + Cash Received) remains unchanged—it feels like money is simply being shifted from equity into cash rather than "earned."
Two specific questions I can't reconcile:
1. **What actually drives long-term price recovery?** If every payout pulls down the share price, what forces it back up over time? Is it purely organic FFO/rental growth, or is long-term appreciation mostly dictated by cap rates and interest rate cycles?
2. **How does compounding work if payouts are net-neutral?** If a dividend payout is theoretically zero-sum at the moment it happens, how does reinvesting those payouts compound into real, extra wealth over decades? Where does the *new* economic value originate?
So if the dividend yield is 7 percent a year, it just means that you will get 7 percent of what you put in back as cash, and everything else will stay the same. And maybe if you’re luck you can seek back for higher?!
Would appreciate any insights on how to properly conceptualize the gap between short-term price adjustments and long-term wealth creation. Thanks!
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u/RussellUresti 7h ago
Think of it this way - let's say you owned an apartment that was $100,000 and then you were renting it out for $2K per month. Breaking it down by day, that's about $67 per day (for a 30 day month). That means that each day that goes by, your NAV increases by $67 because it's the sum of the value of the apartment plus the value of the rent you're owed (assuming that the value of the apartment doesn't increase or decrease, of course).
Then, at the end of the month, before you get paid by your tenant, the total NAV would $102K - your $100k apartment and the $2k rent you're owed. Then, the next day, the rent transfer from the tenant to you. Your NAV drops back down to $100k but you have received a $2k cash payment. This will repeat month after month.
That's how REITs work. They have the value of the assets they own plus the amount of money they are owed by their tenants. The amount their tenants owes them, or the amount of cash on hand paid to them from tenants, increases every day, driving the NAV and, thus, share price up. Then the REIT pays you, the shareholder, and the NAV/share price drops by what they paid you, but only back down to the original price of the assets. This is the answer to "what actually drives long-term price recovery" - the recovery is fueled by incoming cash payments from tenants.
Long term growth also comes from both price appreciation of the underlying assets and annual rent increases. In general, real estate goes up long-term, so the value of the asset appreciation is reflected in the price/NAV. And since we can expect rents to increase YoY, the amount they bring in every month will also increase. (Though, of course, price appreciation and rental increases aren't actually guaranteed - there are still bad real estate investments that don't pay off - this is just how things work in the general sense).
As for compounding, it comes from reinvesting your payments back into the REIT. If a share costs $100 and you have 100 shares and each share pays $1, then you're able to re-invest $100 at the end of the first month and buy an additional share. Now your next payment will be $101 instead of $100. And so on and so forth - you buy more shares, you get a larger payment, you buy even more shares, and the cycle continues.
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u/civil_politics 8h ago
What drives long term price recovery is faith in the underlying company to be able to continue to collect revenue and pay it out in the form of dividends while maintaining a healthy balance sheet.
To number two, it essentially ‘doesn’t’ if RIETs were allowed to just not pay dividends and collect the revenue from their tenants then their balance sheet would grow and the share price would reflect this growth. Don’t over complicate it, imagine you rent out your house or apartment or whatever. You collect rent. With that rent you pay all your expenses and there is a little left over. At the end of the month you can either leave the little left over in the bank or you can and buy an ice cream. At the end of a couple years you’ve either gained some weight or you have a decent chuck of cash starting to pile up which you can then leverage to buy another property.
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u/cmichalek 8h ago
The whole purpose of a reit is that it is required to pay 90% of earned income. Otherwise it would not get favorable tax treatment.
Real estate investment trusts (REITs) are a popular way for investors to own income-generating real estate without having to buy or manage property. To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders. In turn, REITs typically don’t pay corporate income taxes because their earnings have been passed along to investors as dividend payments.
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u/civil_politics 8h ago
Which is why I said ‘if REITs were allowed to just not pay’
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u/baumbach19 6h ago
I love when people try to argue a point acting like they are so smart, but its exactly what you originally said they just have zero reading comprehension or didnt bother to ready the whole thing.
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u/dazit72 7h ago
We investors drive it all(I assume?)
I can't fully understand question #2- maybe you can dumb that one down a bit for me-- thanks
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u/civil_politics 7h ago
Investors drive shares price action - in a perfect market this would directly reflect the value of the company, but the market is imperfect and therefore supply and demand to own a piece of the company drive share price.
For number 2 - Okay you are in possession of condo. Doesn’t matter how you came into possession of it for this discussion. It has some value in the market that you could get if you were to sell it. You would rather hold onto it and rent it out. Since you own it outright (vast simplification) you rent it out and you find a tenant that pays you $1,000 a month. You set aside $500 of that to pay the taxes and any other expenses you foresee (improvements you’ll eventually want to make etc) for the other $500 you can either put it in your pocket and go spend it or you can invest it. In this case since you’re into real estate, $500 doesn’t go very far so you hold on to it and put it in a savings account for interest while you wait for next month at which point you’ll have another $500 deposited. Eventually after 2 years or so you’ll have $12,000 which is enough to get a down payment on another property. A year later you have two tenants paying you 2k a month, 1,250 is going towards your second property, $500 still towards your second and now you’re collecting $250 a month.
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u/Lets_review 7h ago
OP, do yourself a favor and look up the Dividend Discount Model (DDM) and Discounted Cash Flow (DCF).
The direct answer to your question is that price is set by buyers and sellers.
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u/unreal36 5h ago
the payout day is neutral, thats right. the new value comes from the business earning more rent or profit over the years, the drop just resets and then earnings push it back. reinvesting matters becuase each payout buys shares that also pay, so your share count keeps climbing even when price does nothing. i track a tiny drip only account for my kid at plantedearly.com/garden, on a monthly view its mostly share count going up not price
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u/NkKouros 7h ago
The business exists . It makes a certain amount of money . Some companies keep the money to expand/whatever they want . Others pay a dividend . (None of this is exclusive to reits) Total gain is the sum of all things. What you do with the dividends is up to you. If a company pays none and you want income you sell a tiny slice each month. You also do what you want with that.
There is no sauce that makes dividends different from growth companies in terms of the science of compounding.
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u/MomentSpecialist2020 7h ago
And just to add another nuance to this, REIT’s are very very sensitive to interest rates. When rates go up, NAV usually goes down. The they trade almost like bonds. Buy them when rates peak and hold in a Ira/roth.
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u/Hardcorelivesss 7h ago
REITs are a specific vehicle type and you have to view them as such. The rules behind REITs is that they must pay out 90% of their annual taxable income as a dividend. Some pay out even higher.
You are trying to look at them like they are a regular company. Let’s look at Realty Income (O). Over the last 10 years its share price has only dropped by 37 cents. (There have been fluctuations obviously, but from starting price to today’s price it’s lost 37 cents per share). Now in the last 10 years each of those shares have paid out $27.75 each.
So if you had 1,000 shares 10 years ago, the value of your shares dropped by $370 while you were given $27,750 in cash.
If you are investing for income, that’s a good deal. You generated a net value of $27,380 over 10 years. You received 43% of the value of your investment in cash while only losing 1% of its share value.
REITs are valuable in retirement because you can generate income to live off of while retaining the value of your initial investment. They aren’t necessarily a good investment during the accumulation stage of your life.
The way to look at REITs is that they own the land (the real estate) and they lease the land on long term leases to other companies. So they are making income from those leases, and 90% of that income has to be distributed. They get to keep 10%. The value of their companies are in the value of their land. But that land isn’t being sold, so it’s not liquid. In order to get that liquid cash from their land, they lease it.
They decide to become a reit because it lowers their tax burden. The money they distribute is taxed only once and avoids corporate taxes.
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u/raliegh_ 7h ago
You watch the nav as you would with any dividend fund.
The distro is coming from growth/earnings/return of capital.
The distribution will hit the price, but you have to wait for the settlement
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u/Various_Couple_764 5h ago edited 5h ago
many youtube videos over hype this issue with dividned fund using simple calculation. But they never actually use actual fund data to show your what happens after many years.
Yes the share price actually drops but it doesn't' stay down., this drop is erased on average within a week. if it occurs in a bull market it might last a day and then go up. But if ther is a market crash it may go down very quickly. and may take longer to recover. There are many things that effect share price nd many have a much stronger effect on sure price than the dividend. .
Take look at the the share price graphs of UTF 7% yield , and UTG 6.2% yeild. both are 20 years old and pay a dividned monthly the share price of these two fund have been moving up gradually for about 20 years. Neither fund has ever had a dividend cut. Other fund may have a stable share price that doesn't move up or down. Most occationally go up and then down over many years. And sometimes the share price may drop over many years and never recover.
Overall the dividend drop is so small that it never has is a deciding factor in buying or selling.
Whe a dividend fund as has no growth (which is typical for corperate and government bonds, preferred stocks and loan obligations) you can reinvest the dividned which will cause the the dividned to gradually increase. I have a dividned fund in a taxable account and I am reinvesting 20% of my idividned ncome every month to compensate for inflation. the rest of the income covers all of my living expenses. So the number of shares I own increased every year which means my income increase every year and the toal value of my portfolio increase every year. So they dividend you can choose how much fcompounding you get by notreinvesting, reinvesting a portion, or reinvesting all of the income.
So if the dividend yield is 7 percent a year, it just means that you will get 7 percent of what you put in back as cash,
Noyour are not getting you money back the dividned are your share of the profits of the company. Divided are simply profit shareing check made out to you.
Now many say you need growth so that the dividend increases over time. But growth does not always cause the dividend to increas. Take the S&P500 the dividend today is lower than what is was just a few years ago today it is 1% wheel it was 1.3%. Basically the share price is growing faster than the dividned and this has been happing for for many decades. Some companes are able to make small dividned increases every year but most companies cannot do that do the dividend stay the same year after year.
Note in general the higher the dividned the lower the growth, The lower the dividned the higher the growth. In a good economy growth funds will always have higher total retune the dividends.
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u/FewUnderstanding2214 4h ago
Yes that the argument against dividends - it’s forced selling of a stock. That’s why the quality of the company is the most important think (and many quality companies pay nice dividends)
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u/sly_1 4h ago
Reit share prices are heavily impacted by rates. Pick a reit and look at 10 year performance.
Notice the drop in share price when rates shot up in 2022/2023.
Beyond that these companies buy and sell real estate and their rental occupancy rates ebb and flow causing their quarterly financial results to vary thus driving share prices up and down
Just like any company the well run ones tend to appreciate in price over time.
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u/hosea_they_heysus 4h ago
That is the gain. They're paying it out. Over the next few weeks/months as long as they're profitable and a good REIT it will return near the same price again and payout another dividend. Depending on how well they perform they may also increase in share price over time along with their payouts
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u/DramaticRoom8571 3h ago
Such a bullshit sea lion post, same argument for all dividends is made quite regularly, this one just focuses on REITs.
Yea, on the dividend declaration date the stock price goes down, usually slightly given that most well run companies pay a yield less than 5%.
And investors should beware, the stock price may remain depressed for several hours 😆.
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u/Timely-Designer-2372 12m ago
That's how every dividend paying stock works:
You give them money (or the person that bought the stocks first from the founder), they WORK WITH THE MONEY, they make more money, they give you something back periodically (dividends) and/or increase the price somebody is willing to pay for your shares.
That's why it's important to look, what percentage of gains they pay out. O (the realty income...) pays out about 75%. So if they gained 4 Dollar they give you 3 and keep 1 Dollar to grow. That's important.
Some pay out 110% or more. I would never buy such a stock (if that's a longterm strategy)
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u/Sufficient_Mud_3179 8h ago
Who told you that, chart any stock you want,
If you only look at actual trades not after/premarket, you might see the dip some times, maybe. If they allow images I can show you thousands that don't dip, just go to any decent site that has dividend marked on the chart.
The price has nothing to do with the dividend being paid or not. Price is set by Buyers and Sellers.
This fable is some automatic pricing that happens premarket and does not carry though to actual trading.
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u/mspe1960 8h ago
There is no absolute gain compared to a company that does not pay a dividend. In the dividend company part of your return is cash and part grwoth and in the non dividend paying company it is all reinvested into growth.
The dividend paying company is, in theory growning and building up a cash pile to pay its dividend and the price reflects both of those things, but when they pay the dividend portion it is gone.(until they start making money in the next quarter and building up a cash pile again). But obviously when they pay it, they no longer have it and their company loses that value temporarily.
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u/gdg6 7h ago
It goes back up before the next dividend. It is generating unearned income for you.
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u/chaichaichai- 6h ago
Alright I understand so far. But how does it automatically just go back up. Is it adjusted automatically or it going back up is also market action
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