CMFAS CM-EIP REITs & Business Trusts question: REIT advertises an unusually high headline yield

CMFAS CM-EIPREITs & Business Trusts

A REIT advertises an unusually high headline yield, part of which is a return of capital. What should an investor conclude?

A The distribution is guaranteed, because a high yield signals a strong REIT
B A return of capital always increases the true income yield that the investor earns
C Returning capital flatters the yield, so distribution sustainability matters most
D A return of capital means the REIT is legally insolvent and must be wound up

Show the answer and explanation

Answer: C. Returning capital flatters the yield, so distribution sustainability matters most

A distribution that includes a return of capital pays back part of the investor's own money and flatters the headline yield; sustainability matters more than the headline figure, and distributions are not guaranteed.

Common mistake

Treating a high headline yield as guaranteed pure income when it includes returned capital.

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CMFAS CM-EIP REITs & Business Trusts question: REIT advertises an unusually high headline yield

Answer: C. Returning capital flatters the yield, so distribution sustainability matters most

Common mistake

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CMFAS CM-EIP REITs & Business Trusts question: REIT advertises an unusually high headline yield

Answer: C. Returning capital flatters the yield, so distribution sustainability matters most

Common mistake

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