With savings yields lower than they have been in ages, many investors are turning to high-yielding companies for income instead of putting their money in interest-bearing accounts. The market's hottest dividend sector has been REITs, a specialized form of equity allowing investors to own portions of real estate portfolios. Not all yields are created the same, however.
Chasing high yields in REITs could bite you in the end. It is not unusual to see a REIT with a yield of over 10%, and the average yield of the categories is 5.8%. This is not surprising since a REIT is required by the Internal Revenue Service to pay out at least 90% of its earnings as dividends.
But because real estate is capital-intensive and REITs can't retain significant earnings, they tend to employ debt to purchase properties or mortgages, depending on the type of REIT. The debt-to-equity ratio is important as an indicator of how much of a company's structure is due to debt.
Buy at your own risk
Fellow Fool John Maxfield recently warned Fools about seven risky REIT stocks, all of which are among the largest yielders in the space. Outside of those seven stocks, there are other, less risky plays that will still reward you with an above average dividend. Follow along as I examine the REIT industries and identify one company from each that yields above our average yield with debt/equity at or below the average for that group.
REIT Industry |
Companies |
Average Yield |
Average Debt/Equity |
---|---|---|---|
Diversified |
33 |
6.9% |
1.9 |
Health-Care Facilities |
11 |
7.7% |
1.1 |
Hotel/Motel |
14 |
2.7% |
1.7 |
Industrial |
15 |
4.7% |
1.1 |
Office |
18 |
5.3% |
1.3 |
Residential |
25 |
7.6% |
2.4 |
Retail |
38 |
5.8% |
2.1 |
Total |
154 |
5.8% |
1.7 |
Source: FinViz.com
Diversified
Only one company in the diversified group meets the criteria: Chimera Investment
Health-care facilities
Health-care REITs, the smallest of the groups, has fewer stocks to choose from. I found one company, Medical Properties Trust
Hotel/motel
It's not easy to find a decent yield among hotel and motel REITs, the lowest-yielding group. I like Pebblebrook Hotel Trust
Industrial
DCT Industrial Trust
Office
Office REITs own office buildings, which are then leased to businesses and other entities. I like Government Properties Income Trust
Residential
My choice in residential REITs goes against the previous established criteria. This is because so many residential REITs invest in mortgages, something that I'm not keen on. But Senior Housing Properties Trust
Retail
Retail REITs are truly diversified in the types of properties in which they invest. Entertainment Properties Trust invests in a diverse group of properties, including movie theaters, metropolitan ski parks, and public charter schools. Hospitality Properties Trust invests primarily in lodging and travel centers across the country. My choice, Hersha Hospitality Trust
Non-REIT dividends are A-OK
While REITs might be the hottest dividend sector, there are plenty of other dividend stocks out there. If you want to find some great dividends outside of this sector, please request our Special Free Report "13 High-Yielding Stocks to Buy Today" to get some more ideas on dividend plays for your portfolio.