Why It Matters
Distribution yield answers the question: "If I buy this REIT today, what percentage of my investment will I receive back in cash distributions over the next year?" A distribution yield of 5% means a $10,000 investment produces roughly $500 in annual distributions.
At a Glance
- Formula: Annual Distributions Per Share ÷ Share Price × 100
- Expressed as a percentage
- Higher yield does not always mean better investment
- Changes daily as share price fluctuates
- Paid quarterly by most REITs, sometimes monthly
- Distributions may include return of capital, not just income
Distribution Yield = Annual Distributions Per Share / Share Price × 100
How It Works
Distribution yield is calculated by dividing a REIT's total annual distributions per share by its current market price, then multiplying by 100 to express the result as a percentage.
Formula: > Distribution Yield = Annual Distributions Per Share / Share Price × 100
For example, if a REIT pays $1.20 in total distributions over a year and its shares trade at $20.00, the distribution yield is 6% ($1.20 ÷ $20.00 × 100).
The yield moves in two ways. When distributions increase without a matching rise in share price, yield goes up. When share price rises faster than distributions grow, yield compresses downward. This means the same REIT can show different yields on different days purely because the market price changed.
Annualizing is typically done by multiplying the most recent quarterly distribution by four, or by summing the four most recent quarterly payments (trailing twelve months). The trailing method is considered more conservative because it uses actual payments rather than projections.
Distribution yield differs from dividend yield in an important nuance: REIT distributions often include a mix of ordinary income, capital gains, and return of capital (ROC). Return of capital lowers your cost basis rather than representing taxable income in the current year, which affects how you calculate after-tax returns.
Real-World Example
Keiko is evaluating two publicly-traded REITs for her income portfolio. She looks at an equity REIT that owns apartment buildings and a mortgage REIT that holds residential loans. Understanding the different REIT types helps her interpret each yield correctly.
The apartment REIT pays $1.40 per share annually and trades at $28.00, giving a distribution yield of 5.0%. The mortgage REIT pays $2.40 per share annually and trades at $20.00, giving a yield of 12.0%.
The mortgage REIT's yield looks more attractive at first glance. But Keiko investigates further. She discovers the mortgage REIT's high yield partly reflects elevated interest rate risk — mortgage REITs borrow short-term and lend long-term, so rising rates squeeze their margins and often trigger distribution cuts. The apartment REIT's lower yield comes with more stable, rent-backed cash flows and a history of steady distribution growth.
Keiko decides to look at a hybrid REIT as a middle ground, which owns both physical properties and mortgage instruments. Its 7.5% yield sits between the two extremes and offers a degree of diversification across income sources.
She ultimately builds a position in the apartment REIT, accepting the lower current yield in exchange for what she believes is a more sustainable distribution — one less likely to be cut during a rate cycle.
Pros & Cons
- Provides a straightforward comparison of income potential across different REITs and funds
- Updates automatically as market prices change, reflecting current income-to-price relationships
- Useful for screening income-focused investments quickly
- Helps estimate cash flow from a portfolio without complex modeling
- REIT distributions are often higher than common stock dividends due to required payout ratios
- A high yield can signal distress rather than generosity — price may have fallen because the distribution is unsustainable
- Does not account for distribution growth over time, which may be more valuable than a high current yield
- Mix of income types (ordinary income vs. return of capital) complicates after-tax comparisons
- Share price volatility means yield changes constantly, making historical comparisons tricky
- Tells you nothing about the underlying quality of the REIT's assets or management
Watch Out
Yield traps are the most common pitfall. When a REIT's share price falls sharply — often because the market expects a distribution cut — the yield spikes to eye-catching levels. Investors attracted by the high yield buy in just before the distribution is reduced, suffering both an income loss and a capital loss simultaneously.
Always check the payout ratio alongside distribution yield. REITs use funds from operations (FFO) rather than net income as their earnings benchmark. If distributions are running well above FFO, the payout is likely unsustainable regardless of how appealing the yield looks.
Also distinguish between yield on cost and current yield. If you purchased shares at $15.00 and the REIT now trades at $25.00, your personal yield on original cost is much higher than the yield a new buyer would receive today. These are different numbers and mean different things.
The Takeaway
Distribution yield is the go-to metric for sizing up income from REITs and investment funds — but it is a starting point, not a conclusion. A compelling yield is only valuable if the underlying distributions are sustainable. Always pair yield with payout ratios, FFO trends, and an understanding of the REIT's business model before committing capital.