With the stock market still trading around record levels and interest rates exceptionally low, finding yield in the current market is tough. Finding safe high-yield stocks is even more difficult. Right now, some of the highest-yielding stocks are in the mortgage real estate investment trust (REIT) space; however, that sector is risky given that the Fed is going to raise interest rates and vastly reduce its purchases of mortgage-backed securities. This is because inflation is rising.
Here are some REITs that have a decent yield and are either highly safe or will benefit from the current rise in commodities and real estate. I will also mention a stock that will benefit from the planned increase in interest rates.
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1. Rising lumber costs help Weyerhaeuser
Weyerhaeuser (WY -0.54%) is a timber REIT that's benefiting from higher lumber prices. Weyerhaeuser owns and operates timberland and also lumber processing facilities. The company's performance will generally be driven by homebuilding in general; however, the current commodity price inflation is helping out as well.
Lumber prices more than doubled in 2021, and since Weyerhaeuser's costs didn't double, that extra revenue fell to the bottom line. After giving back some of those gains late in the year, lumber is back on the march, with prices rising as inflationary pressures remain strong.
Weyerhaeuser has an unusual dividend structure. It pays a quarterly dividend of $0.17, which is meant to be sustainable over the entire commodity cycle. It then pays a supplemental dividend once a year that will be based on earnings. Excluding the supplemental dividend, Weyerhaeuser had a yield of 1.7% at Tuesday's closing price. The company paid a special dividend late last year and should be declaring its next special dividend soon.
2. Realty Income should be a core holding of any income investor
Realty Income (O 1.46%) is a real estate investment trust that specializes in single-tenant properties under a unique lease arrangement called a triple-net lease. Under this arrangement, the tenant is responsible for the rent, taxes, insurance, and maintenance. The leases are generally longer-term and reset annually. Only the most stable companies qualify for such a lease.
During the COVID-19 pandemic, most REITs reported big decreases in earnings and dividends. Realty Income increased its monthly dividend three times in 2020. The company pays a monthly dividend of $0.247, which gave the stock a yield of 4.2% at Tuesday's prices. Since Realty Income is such a steady performer, it should be one of the first stocks considered for an income investor.
3. Rising real estate prices help Equity Residential
Equity Residential (EQR 0.96%) is an apartment REIT that specializes in apartments for affluent young urban renters. It concentrates on luxury properties in urban areas characterized by fast growth and a concentration on knowledge industries. During the COVID-19 pandemic, its tenant base was able to work remotely and its collections remained high.
Equity Residential was forced to make concessions in order to maintain occupancy during the pandemic as tenants had the upper hand in negotiations. During 2021, this depressed earnings; however, those below-market leases are now resetting to market. Given that home prices have been on a tear, rental prices are rising as well. Equity Residential pays a quarterly dividend of $0.603, which gives the stock a yield of 2.7%. This isn't a massive yield, but earnings and dividend should be increasing as rents reset to market rates.
4. CME Group will benefit from rising rates
CME Group (CME 0.59%) is the biggest derivatives exchange in the world, trading stock index futures (like S&P 500 futures contracts) commodity contracts, and interest rate futures and options. When the Fed cut interest rates to 0%, trading volumes in interest rate futures decreased as many market participants didn't need to hedge against falling rates any more. As the Fed begins to raise rates, that situation should reverse, and we will see more trading in interest rate futures. Second, commodities are in a bull market, and exchanges benefit from extra trading interest.
CME has a competitive moat that is almost impossible to duplicate. Rising rates are generally not good news for financial stocks, but it is good news for this one. At Tuesday's levels, it paid a 1.6% dividend yield. This isn't necessarily a high yield per se; however, the earnings and dividend should have upside as volumes in interest rate products return.
