It's rare to find high-dividend stocks with safe payouts, whose businesses also have room to grow over the long term. However, the good news is that stocks like this do exist, especially in the real estate sector. Here are three real estate investment trusts, or REITs, all of which pay dividend yields above 5%, that could generate both income and growth in your portfolio for years to come.
Senior housing could grow rapidly
Senior Housing Properties Trust (DHC -1.25%) pays a 7.9% dividend yield and invests in healthcare properties.
Image source: Getty Images.
As the name implies, senior housing makes up a large portion of the portfolio of 433 properties, but that's not the only type of healthcare real estate the company owns. About 40% of the portfolio is medical offices, and there are also smaller holdings in skilled nursing and wellness properties.
The reasons for investing in healthcare real estate, and especially a company that caters to the needs of seniors, are simple to understand. The U.S. population is aging rapidly, and the 65-and-over population in the United States is expected to grow by more than 20 million by 2030. Older age groups, such as 85-and-older are growing even faster.
Image source: Senior Housing Properties Trust investor presentation.
Senior Housing Properties Trust has a unique advantage because its 97% private-pay asset mix is among the best in the industry. Private-pay healthcare is typically far more stable and predictable than healthcare that depends on government reimbursements, so this is a good thing for long-term stability and dividend safety.
Speaking of the dividend, the yield may sound too good to be true at first, but consider that it represents just 83% of the company's normalizes FFO, and that the portfolio is designed to produce stable and predictable growth.
Hotels have a unique pricing advantage
Hotel real estate investment trust Apple Hospitality REIT (APLE -1.77%) pays a 6.4% dividend yield, and operates 236 Hilton and Marriott-branded hotels in 33 states, with a particular emphasis on extended stay and select-service brands like Homewood Suites, Residence Inn, and SpringHill Suites. The company's business model is to maintain a diverse portfolio of hotels that operate under well-known brand names, partner with excellent operators, and continually reinvest in its properties to maintain a competitive advantage.
Now, unlike healthcare properties, which are an inherently defensive type of real estate, hotel properties can be a bit more volatile, maximizing profitability in prosperous economic times, but suffering more when things go badly. However, hotels have the unique advantage of being able to adjust rental rates on a daily basis, which allows it to take full advantage of the good times, while quickly adapting to falling market rental rates during recessions.
Another advantage for investors is that unlike many hotel REITs, Apple Hospitality's operators are paid a variable management fee, based on each property's performance. This gives the operators a unique incentive to run efficient hotels and to go above and beyond with guest satisfaction.
Apple Hospitality REIT operates at a higher EBITDA margin than most peers, and has plenty of room to grow, especially after Marriott's recent merger with Starwood Hotels, which adds upscale brand names like Sheraton, Westin, and W Hotels to Marriott's portfolio.
Image source: Apple Hospitality REIT investor presentation.
Diverse properties with room to grow
EPR Properties (EPR -0.10%) pays a 5.7% dividend yield and invests in three different types of properties -- entertainment, recreation, and education. The company owns a total of 320 properties in 41 states, D.C., and Canada, and has grown at an impressive rate in recent years, including about $1.3 billion in new investments since 2014.
EPR's entertainment and recreation properties include megaplex movie theaters, ski parks, waterparks, and golf complexes, and combine to make up about three-fourths of the portfolio. The idea behind focusing on these property types as an investment is that millennials like to spend money on experiences -- which is supported by the fact that the total spending on these types of activities has steadily risen as millennials have come of age.
Image source: EPR Properties investor presentation.
Impressively, EPR owns about 200 entertainment and recreation-oriented properties, and this portion of the portfolio is nearly 100% leased (more than 99%). Tenants are on long-term (11+ year) leases, with gradual rent increases built in. On average, only about 3% of the company's leases expire in any given year.
In addition, the education properties make up the other 25% of the portfolio, and represent perhaps the best growth opportunity going forward. Public charter school enrollment is currently at 3.1 million students, and has grown at a 12% annualized rate over the past 15 years. However, supply has not grown quite as fast as demand, resulting in a waiting list of more than a million students. In fact, EPR says that charter schools alone represent a $2.5 billion market opportunity for the company, with an additional $2 billion opportunity in private schools and another $1 billion from early childhood education.
These aren't risk-free, especially over short time periods
It's important to mention that all three of these companies have significant risk factors to be aware of, especially over short periods of time.
Interest rate risk is a big one, at least in regards to the stock prices. Rising rates are generally bad for REITs, and if rates increase faster than the market is expecting, it could easily cause these stocks to drop. In addition, there are company-specific risks with each of these. For example, senior housing demand could slow, leading to oversupply problems. A recession could occur, leading to less demand for hotel stays and less spending on entertainment.
The point is that if you invest in these, expect some volatility over shorter time periods. However, over the long run, all three of these companies have solid business models that should produce strong returns. Invest accordingly.
