Real estate investment trust (REIT) stocks are among the highest yielding dividend stocks because REITs are required to pay out at least 90% of their income as dividends in order to qualify for preferential tax treatment. REITs own various types of real estate, which they lease to others primarily for use in their operations or for storage.

REIT stocks have been among the top performing stocks in the market in recent years, propelled in part by low interest rates. With modest rate hikes likely looming on the horizon, investors need to be more discriminating when selecting REIT stocks, most of which have recently pulled back. 

So which REIT stocks are the best buys now? Here are three top ones to consider.

Best REIT stocks to buy now

Market Cap
REIT Category
 Dividend Yield
Forward Price/AFFO*1-Year Return (Inc. Dividends)10-Year Return (Inc. Dividends)
Realty Income Corp. (NYSE:O)  $16.1B  Retail  3.8%  21.4   29.9%  306%
Welltower (NYSE:WELL)  $25.4B Healthcare  4.9%  15.3  8.7%  195%
Iron Mountain (NYSE:IRM)  $9.0B Industrial  5.7%  15.3  16.9%  120%
S&P 500      2.07%    8.8%  93.6%

Data sources: YCharts and, except for forward price/AFFO, which was calculated by author; data to Oct. 14, 2016. *AFFO = adjusted funds from operations; FFO and adjusted FFO are akin to "earnings" and "adjusted earnings" for REITs. 

A REIT stock that pays you a dividend each month 

Exterior of an LA Fitness building, one of Realty Income's tenants.

A gym is a service-based business that's largely insulated from online competition. Image source: Realty Income.

Realty Income Corp. touts itself as "The Monthly Dividend Company" because it pays its dividend on a monthly basis. The San Diego-based company focuses on investing in free-standing real estate in the United States, with about 80% of its portfolio of 4,646 properties occupied by retailers and 20% by industrial and other companies. It has properties located in 49 states plus Puerto Rico.

Realty Income's portfolio is very stable because it targets tenants whose operations insulate them from online competition, such as service-based business, or help protect them from economic downturns, such as retailers selling non-discretionary items (like pharmacies). The company's highly predictable income stream stems from its tenant stability combined with its use of long-term, triple-net leases, where tenants pay variable expenses, such as maintenance costs. Its strong and dependable income stream enabled the company to increase its monthly dividend in September for the 88th time and for the 76th consecutive quarter.

Realty Income's financial performance continues to be solid. For the first six months of 2016, revenue increased 7.5%, while adjusted funds from operations (AFFO) per share rose 4.4%. The stock's priced at 21.4 times the company's projected 2016 AFFO, which is somewhat on the high side. That's because this is a top quality REIT and its price has been bid up considerably over the last year. So while the stock could continue its pullback, it remains an attractive choice for investors with a long-term focus. 

A REIT stock play on the aging of baby boomers 

A view of a Welltower senior housing community.

A senior housing community. Image source: Welltower.

Welltower is diversified across several types of healthcare real estate. It owns more than 1,400 properties in major, high-growth markets in the U.S., Canada, and the U.K. More recently, it has begun focusing heavily on senior housing, as the company believes the aging of the huge baby boom generation will profitably support this focus for many years to come.

The Toledo, Ohio-based company was known as "Heath Care REIT" before changing its name in 2015, as part of its business transformation. To that end, Welltower fully exited the inpatient hospital business in the U.S. in 2015 and has been selling other non-core properties to generate capital to increase its senior housing holdings. It's particularly keen on premium properties in top metro markets with high barriers to entry. 

For the first six months of 2016, Welltower's revenue jumped 14.7% thanks largely to its acquisition activity, while "normalized FFO" (analogous to AFFO) per share rose 7%. The stock's priced at 15.3 times the company's projected 2016 normalized FFO, which is par for the course for its class. It's priced at a discount to Realty Income, likely reflecting that its income stream has not grown as dependably and predictably as has Realty Income's over the long term. The company's transformation of its portfolio could change this.  

A REIT stock that's among the highest dividend yielding

Exterior and interior views of an Iron Mountain facility.

Exterior and interior of an Iron Mountain facility. Image source: Iron Mountain.

Boston-based Iron Mountain provides storage and information management services for companies and government organizations, though it's also been expanding into related operations, including data centers. It has a portfolio of approximately 1,400 facilities located in 45 countries on six continents that serve more than 220,000 customers, including about 94% of the Fortune 1000 companies. No single customer accounts for more than 1% of its revenue, so it's well diversified.

This is an extremely stable business that has relatively low maintenance cost. Thanks to its steady storage rental revenue, Iron Mountain has generated predictable, low-volatility growth in key financial metrics, including AFFO, over the long term. Companies and government organizations always will need the type of services provided by Iron Mountain, which makes its business about as insulated from economic downturns as possible.

For the first six months of 2016, Iron Mountain's revenue increased 7.9% as reported and 11.3% in constant currency, driven by a large acquisition (Recall) in early May. Normalized FFO per share, however, increased just 1%, largely because Recall's margins are lower. Many factors can affect normalized or adjusted AFFO over the short term, but we don't want to see revenue growing considerably faster than it over the longer term. Investors should monitor this situation going forward. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.