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Real estate investment trusts, or REITs, are some of my favorite stocks in the market -- and for good reason. High-quality REITs can provide you with a growing stream of income as well as the potential for market-beating capital appreciation, and one smart area to consider is smaller REITs that many investors overlook. Here are three great examples of REITs that happen to pay dividends every month.
A great product and highly invested management
Apple Hospitality REIT (APLE +1.14%) specializes in hotel properties, with a portfolio of 179 hotels consisting of nearly 23,000 guestrooms. The hotels, which are divided among the Hilton and Marriott brand names, are spread across 32 states.
Apple Hospitality's business model is simple and effective. Invest in upscale hotels with strong brand names, hire great operators, and reinvest substantial money back into the business to maintain the competitive advantage. In fact, the average effective age (since built or last major renovation) is just four years, and only 12% of the portfolio is effectively seven years old or more. Not only does this lead to lower ongoing maintenance expenses, but it also means that Apple Hospitality offers a high-quality product.
Perhaps my favorite thing about Apple Hospitality REIT is its management and how much motivation they have to succeed. Collectively, the management team has purchased over 400 hotels, established and operated eight hospitality REITs, and has raised and invested about $7 billion in hotel assets. Furthermore, and most important to investors, the management team is highly invested in the company, and therefore has motivation to create value for shareholders. In fact, all executive officers are required to own shares equal to at least three times their salary, and 80% of executive compensation is incentive-based.
Apple Hospitality pays a 6.7% dividend yield in monthly installments. While this is a relatively new REIT, only existing in its current form since March 2014, the growth so far has been quite promising. First-quarter EBITDA and funds from operations (FFO) were both up more than 10% year over year, and margins rose by 60 basis points. Plus, the dividends paid only made up three-quarters of FFO, so there's no reason to worry about the safety of the payout.
Healthcare real estate is on sale
I've written before about how REITs focused on healthcare properties are cheap right now -- mainly because of poor financial results from many facility operators. And, I've also said that long-term, healthcare real estate is a tremendous opportunity for those willing to ride out the tough times. The aging population and rising healthcare costs should create growing demand for decades to come.
For investors who prefer monthly dividends, LTC Properties (LTC +0.45%) is a great way to play it. As the name suggests, LTC is focused on long-term care properties, with the portfolio split between skilled nursing and assisted living facilities. LTC partners with some of the best operators in the business, such as Senior Lifestyle Corporation, Genesis HealthCare, and Brookdale Senior Living.
The REIT has 212 properties spread out over 30 states, and has six more under development. Growth has been particularly impressive lately. As of the first quarter, revenue grew by 22.6% year over year, and per-share FFO (the "earnings" of the REIT business) grew by 16.9%. And, it has produced this growth while maintaining a low debt load -- just 25.7% of LTC Properties' capitalization comes from debt.
As far as dividends go, LTC pays a 4.3% annual yield in monthly installments. Since 2005, the dividend has grown by an average rate of 4.8% per year. The dividends paid during the first quarter of 2016 represent just 71% of the company's FFO, so there is plenty of room for future increases as well.
Industrial real estate for low-maintenance income
STAG Industrial (STAG +1.59%) buys and operates single-tenant industrial properties. Industrial properties have lower ongoing expenses and higher tenant retention than other types of real estate, and the market is highly fragmented, implying lots of opportunity for expansion. In fact, STAG estimates its target market at $250 billion in size, of which it currently has less than a 1% market share -- which is impressive when you consider how fragmented the industrial REIT space is.
As STAG said in its latest investor presentation, the company's advantage is that they're bringing an institutional approach to a non-institutional market. Management is highly selective when it comes to acquisitions -- out of over 1,000 potential transactions examined in 2015, just 33 closed at a weighted average capitalization rate of 8.4% (on the high end for REITs).
The portfolio is highly diversified, in terms of geographical location, tenants, and industry. Only one tenant makes up more than 2% of the portfolio, and the top 10 account for just 17.2%.
STAG pays a 6.1% dividend yield as of this writing, well above its peer group average. The company also trades for a cheaper valuation than its peers at 14.2 times 2016 FFO vs. the average of 19.9. So far, the company has done a good job of creating value for its shareholders. Since its IPO in 2011, STAG has increased its dividend by 34% and has delivered an impressive 118% total return to shareholders (about 17% annualized).
Just a start
This is just a sampling of the excellent stocks in a sector that far too many investors don't utilize in their portfolios. High-quality REITs have some of the best and most stable dividends in the market, and can produce incredible performance over the long run, so you should really consider adding a few to your investment strategy.
