When you go to the mall to buy a pack of batteries from RadioShack (NYSE: RSH), neighboring shops hope you’ll pop in for sunglasses, T-shirts or baked cookies. That was the notion that inspired Victor Gruen, who designed the first fully enclosed shopping mall in the 1950s. (The Southdale Mall, in Edina, Minnesota, is still in use today.)

#-ad_banner-#​Gruen understood that by grouping shops together in one central place, each store would benefit from what’s known as a network effect. Today, that network is unraveling, potentially threatening the entire shopping mall concept. 

RadioShack, for example, is in the process of closing 1,000 stores, many of them in malls. Countless impulse buyers, in search of the company’s products, have one less reason to go to the mall, and as a result, neighboring retailers will see reduced foot traffic. 

We’re not just talking about the loss of a store here and there. According to a recent tally by USA Today, thousands of stores are set to close over the next few years.

The important names in this group are Barnes & Noble (NYSE: BKS), J.C. Penney (NYSE: JCP), Sears Holdings (Nasdaq: SHLD) and Toys ‘R Us. These are known as anchor tenants, operating big-box stores that act as powerful magnets for shoppers. A number of malls across the U.S. have lost not one but several anchor tenants. Those are the malls that are now characterized by eerily quiet foot traffic — and an employee count across the mall that can sometimes outnumber the customer count. 

When a sufficient number of stores close, the massive level of expenses needed to operate a mall start to become untenable. Green Street Advisors, which analyzes the industry, predicted in 2012, that 10% of all malls would need to close over the coming decade. By early 2014, they had revised that figure to 15%, and the number may move higher still: Many of those store closures noted in the table above were made after Green Street revised that forecast. 

With this backdrop in place, it’s time to scrub any exposure to shopping malls from your portfolio. And many investors unwittingly have such exposure when they buy real estate investment trust (REIT) mutual funds and exchange-traded funds (ETFs). Remarkably, many of these mall REITS trade near all-time highs, and the steady stream of store closures has yet to impact their valuation.

These mall REITs appear to offer decent dividend yields, and many of them boosted their dividends at as solid pace in 2013. Yet the rapidly deteriorating economics of shopping malls suggests that dividend growth in the future is likely to slow sharply, and in some instances, dividend cuts may be the future path. That happened in 2013 at Glimcher Realty Trust (NYSE: GRT), and many other mall REITs already apply nearly 100% of their cash flow to dividends.

	​
	Flickr/aloha75
	Despite once being a powerful anchor tenant, J.C. Penney now plans on closing 33 stores, with more to come.

As we’ve noted over the past year, the path ahead for dividend investors is to seek out companies capable of solid dividend growth, and not necessarily solid current dividend yields. Indeed, with interest rates seemingly poised to rise in coming quarters, these mall REITs, with their likely slow or negative rate of dividend growth, could prove to be especially vulnerable.

To be sure, some malls are better than others. Newer properties that host some of the most appealing retailers will fare a lot better in the coming shakeout than those malls that are perceived as dowdy or unappealing by consumers. 

Merrill Lynch took a look at the mall REITs and ranked the industry from best to worst, in terms of the relative appeal of their malls’ financial health, demographic appeal, quality of anchor tenants and market positioning.

Those analysts concluded that the U.S. properties owned by Australia’s Westfield Group (OTC: WFGPY) and Taubman Centers (NYSE: TCO) stand out as industry winners. Bringing up the rear: CBL & Associates (NYSE: CBL) and newly public Washington Prime Group (NYSE: WPG), a set of malls carved out of the portfolio of Simon Property Group (NYSE: SPG).

Wondering which mall REITs have a lot of exposure to struggling anchor tenants such as J.C. Penney and Sears Holding? General Growth Properties (NYSE: GGP) (those two are 40% of all anchor tenants) and Simon Property Group (35%).

Another ominous sign: When anchor tenants have vacated, a pair of retailers have tended to pick up the slack: “Dick’s Sporting Goods (NYSE: DKS) has been one of the most active retailers leasing vacant anchor space, with 94 anchor stores in these mall portfolios, up from 76 two years ago. Target (NYSE: TGT) also has been taking empty anchor space, and currently occupies 51 anchor locations at these REIT portfolios,” note Merrill’s analysts.

Notably, both of these retailers have experienced their own headwinds recently. For mall REITs, the hits keep on coming.

Risks to Consider: As an upside risk, the slowly improving mood among consumers could help to stem further traffic declines at malls.

Action to Take –> This isn’t an indictment of retail stocks. Many of them appear to be taking the tough steps to regain fiscal health, and their share prices already reflect tough times, unlike mall REITs, which trade as though there were no storms overhead. If you have had a great run with these stocks over the past five years, the macro retail environment, coupled with rising rate environment, suggests it is time to book profits.

REITs have long been a favorite tool of America’s wealthiest investors for generating safe, rising income — but we’ve found a little-known group of investments the wealthy have used to generate dividend yields of 12% or more for decades. Click here to learn more about these special investments.