NUTS & BOLTS
CROWD FUNDING
Lost and Found REAL ESTATE CROWDFUNDING ADDRESSES THE ‘MISSING DIVIDENDS’ PROBLEM. ne of the simplest ways for companies to communicate financial well-being and shareholder value is to say that “the dividend check is in the mail.” Dividends—those cash dis- tributions that some companies pay out regularly to sharehold- ers from earnings—send a clear and powerful message about that company’s current performance and future prospects. A willingness to pay steady dividends over time provides a good clue as to the fundamentals of the company’s business. INVESTORS IGNORE CURRENT INCOME AT THEIR PERIL With the stock market, experience confirms that dividend yield has arguably accounted for almost one-half of stocks’ total return. When inflation is taken into account, then the dividend component represents almost 75 percent of stocks’ annual in- vestment return. And when the compounding effect of reinvest- ed dividends is further considered, some observers claim that dividends made up about 95 percent of the compounded long- term return earned by companies in the S&P 500 through 2007. Similar studies have confirmed the importance of current cash flow (dividends) to investment results. Robert Shiller of Yale, Societe Generale and the Royal Bank of Canada have all come to similar conclusions. WHERE HAVE ALL THE DIVIDENDS GONE? In the United States, however, fewer and fewer industries offer regular and significant dividends, and such payouts represent an increasingly small portion of overall investment returns, which themselves are diminished. Until the 1950s, it was the norm for equities to have a higher yield than bonds. Shares were perceived to be riskier, so investors demanded higher payouts for owning them. As larger institutional investors became prevalent, however, the demand for equities increased to a point where equities began by Lawrence Fassler O
to yield less than government bonds did. These investors, too, believed that there was a tendency for dividends to increase over time, making equities potentially preferable even where their yields were initially below those of bonds. The opposite fundamental shift has occurred since the financial crisis of 2008, with some investors seeking a higher overall dividend yield on equities to reflect the riskier nature of the income stream. Government bonds are again valued for their safety, especially in a world of low inflation. It remains the case, though, that the United States has relatively few dividend-paying companies compared to other developed countries. Banks were big dividend-payers until the financial crisis of 2008. Energy and mining companies were good income sources, but falling commodity prices are leading them to reduce their payouts. The pharmaceu- tical and health-care sectors seem to be among the few left standing. Standard & Poor’s reported that 504 U.S. companies cut their dividends in 2015, nearly double the number of the previous year. REAL ESTATE CROWDFUNDING ADDRESSES THE CASH FLOWPROBLEM Real estate crowdfunding of commercial properties can give investors a chance to “have it all”—ongoing cash flow and, with equity investments, participation in potential ap- preciation. These investments can run the gamut of possible real estate opportunities—from pre-vetted first-lien loans to
COMPARINGVOLATILITY
40%
30%
20%
10%
0%
CASH CRE BONDS STOCKS
PUBLICLY TRADED REITs
SOURCES :: NCREIF NPI (CRE); Barclay’s U.S. Aggregate (Bonds); NAREIT All Equity REITs (Publicly Traded REITs); S&P 500 (Stocks); 10 Yr U.S. Treasury (Government Bonds); 3 Month U.S. Treasury (Cash). Note: Volatility is measureed from quaterly annualized data. 1983 (Q2) - 2013 (Q1).
108 | think realty magazine july :: august 2016
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