Please ensure Javascript is enabled for purposes of website accessibility

3 Stocks to Buy With Dividends Yielding More Than 5%

By Matthew Frankel, CFP® – May 31, 2017 at 8:43AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These stocks pay high dividends, have lots of growth potential, and aren't too risky.

One of the best places to look for high-dividend investments is in the real estate sector, specifically in equity REITs. Not only do many of these stocks pay above-average, reliable dividends, but there is also significant growth potential as the companies' underlying property portfolios appreciate in value. Here are three excellent examples of REITs that look attractive now, all of which pay dividend yields of more than 5%.

Company

Recent Stock Price

Dividend Yield

Senior Housing Properties Trust (DHC -1.95%)

$21.12

7.4%

EPR Properties (EPR -1.31%)

$71.08

5.7%

Life Storage Inc.(LSI -1.35%)

$76.36

5.2%

Stock prices and dividend yields as of 5/29/2017.

Jar of coins labeled "dividends."

Image source: Getty Images.

1. Senior Housing Properties Trust

As the name implies, Senior Housing Properties Trust invests in senior housing properties, but that only makes up a little more than half of the portfolio. The rest is composed of medical office buildings, with smaller concentrations of skilled nursing facilities and wellness centers. As of this writing, the company has 434 properties located in 42 states and D.C.

SNH portfolio composition.

Image source: Senior Housing Properties Trust investor presentation.

While Senior Housing Properties Trust's 7.4% dividend yield might seem too good to be true, that doesn't appear to be the case. The annual dividend of $1.56 per share corresponds to a payout ratio of just 83% of normalized funds from operations (FFO), which isn't especially high for a REIT. Plus, 97% of the portfolio is made up of private-pay healthcare businesses, which tend to be far more stable and predictable than revenue dependent on government reimbursements.

Finally, the supply-and-demand dynamics of the healthcare real estate market should be quite favorable for investors going forward. Simply put, the U.S. population is aging rapidly, with the 65-and-older age group expected to roughly double by 2050, and older age groups are growing even faster. In fact, the 85-and-older population in the U.S. is expected to roughly triple over the next three decades. This should create a steady stream of opportunities in healthcare, especially in senior housing.

2. EPR Properties

Diversified REIT EPR Properties invests in three types of properties. The largest portion of the portfolio is entertainment properties, primarily megaplex movie theaters, and the company also has substantial investments in recreation and educational properties. In total, EPR owns 338 properties, and continues to grow at a rather rapid pace, especially in the recreation and entertainment areas of the portfolio. In fact, EPR has agreed to acquire a portfolio of 15 water parks and amusement parks, and the transaction is expected to close during the current quarter.

EPR investment history.

Image source: EPR Properties investor presentation.

While entertainment and recreational properties can see revenue rise and fall with the health of the economy, it's important to mention that EPR's tenants are on long-term leases, typically with rent increases built right in. In fact, the average property in the newly acquired recreation portfolio I just mentioned has 18 years left on its lease. In other words, EPR doesn't need to worry much about a spike in vacancies if the economy turns sour. Nearly half of the company's leases expire after 2027.

Furthermore, the entertainment and recreation properties are a long-term play on the experience-oriented mindset of millennials. This generation of about 75 million people values experiences over simply buying things, and as millennials age, their buying power should increase dramatically.

Finally, EPR's education portfolio is an especially interesting opportunity. The number of public charter schools has grown at a 7% annualized rate since 2002, while the number of students at public charter schools has grown at a 12% rate. Demand is dramatically outpacing supply, and there are more than 1 million students on charter school waiting lists.

EPR sees a potential $2.5 billion market opportunity in public charter schools, as well as another $3 billion between private schools and early childhood education centers. This could provide a steady stream of growth for EPR, no matter what the economy is doing.

3. Life Storage

Formerly known as Sovran Self Storage and under the Uncle Bob's Self Storage brand name, Life Storage, Inc. is one of the larger players in the self-storage industry with about 650 facilities.

Life Storage is growing rapidly, with $1.8 billion in acquisitions last year alone, and has done a good job of growing same-store revenue as well. Over the past five years, same-store net operating income has grown at an annualized rate of 8.3%, while expenses have only grown at a 2.2% rate.

Life Storage investment history.

Image source: Life Storage investor presentation.

To be fair, the self-storage business has been a beneficiary of the strong U.S. economy, and would likely suffer if times got tough. Tenants are generally on month-to-month leases, and can easily vacate if they need to cut back on expenses. However, keep in mind that self-storage is a relatively inexpensive form of real estate to operate. Maintenance, staffing, and turnover expenses are all much lower than with most other types of commercial real estate. In other words, the company could afford a significant drop in earnings while remaining profitable and paying its dividend. In fact, 2017's dividend payments are expected to make up less than 70% of the company's FFO, so shareholders don't need to worry about the safety of those big payments.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Diversified Healthcare Trust Stock Quote
Diversified Healthcare Trust
DHC
$0.96 (-1.95%) $0.02
EPR Properties Stock Quote
EPR Properties
EPR
$36.77 (-1.31%) $0.49
Life Storage Inc Stock Quote
Life Storage Inc
LSI
$110.66 (-1.35%) $-1.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.