Dividend growth and payouts from REITs are heavily dependent on the underlying portfolio's ability to generate cash flow, primarily through rents and rental growth from tenants, said Martin of Morningstar.

Equity REITs have had an average annualized dividend growth rate of 5.75 percent the last two decades as of August, or more than double the average rate of inflation, according to Morningstar. Annual dividend growth is projected to be from 4 percent to 6 percent for the next several years, likely exceeding inflation, Martin said.

Recession Worries

Those convinced that the U.S. is "at the beginning of a horrible recession" should be wary of investing in REITs because an economic decline would weaken demand for commercial space, increase vacancies and limit cash flow at income- producing properties, said Ralph Block, the Westlake Village, California-based author of the Essential REIT newsletter and the upcoming fourth edition of "Investing in REITs" guidebook.

"For anybody to make an investment it requires some kind of faith in the future," Block said. "It requires faith that businesses are going to be profitable, they're going to want to grow, they're going to want to take more space. If you don't think any of that's going to happen, you shouldn't be investing in REITs."

Agran, the Los Angeles investor, said he's relying on higher dividends from preferred shares to get him past any market downturn. He said he plans to rebalance his REIT allocation, so that 50 percent of his investments are in REIT preferred stock and 50 percent in common shares to put his portfolio in a "safer position."

Bloomberg's Biffert said he looks at rent growth and the ability to drive cash flow over the long term when evaluating REITs. "You'd want to increase your exposure to sectors where cash-flow growth is outpacing inflation," he said. The average inflation rate through July was 2.9 percent, Bloomberg data show.

Apartment REITs are projecting net operating income growth from 4 percent to 6 percent this year, Biffert said. Retail shopping center rents are projected to grow from 1 percent to 2 percent in established markets, offices in core central business districts such as New York and San Francisco may rise as high as 2 percent, and suburban office rents may decline 2 percent to 3 percent. Industrial properties may be flat to down 1 percent, he said.

"The growth outlook for commercial real estate will be highly dependent on asset type, quality and market," Biffert said.

REITs and Inflation