With the stock market at record high levels, it's getting tougher to find attractive dividend stocks to buy. Many of the most popular dividend stocks trade at sky-high valuations, pay minuscule yields, or both.

However, one sector that has gotten cheaper lately is real estate. Thanks primarily to expectations of rising interest rates, REITs have been some of the market's worst performers. While not all REITs are great long-term investments at their current valuations, the sector weakness has created the opportunity to add some solid, high-yield stocks to your portfolio.

Here are three REITs in particular that are worth a look as 2018 gets under way, and why I think each could be a smart choice.

Company (Stock Symbol)

Recent Stock Price

Dividend Yield

P/FFO Multiple (2017)

Realty Income (O 1.94%)




Welltower (WELL 0.56%)




AvalonBay Communities (AVB 1.16%)




Data source: TD Ameritrade. P/FFO: price-to-funds from operations ratio. Stock prices, dividend yield, and P/FFO figures current as of 1/15/2018. P/FFO is based on each company's most recent 2017 full-year adjusted FFO guidance.

A clear glass jar of coins labeled dividends.

Image source: Getty Images.

A different kind of retail investment

Retail REITs have been one of the worst-performing subsectors of real estate. Not only have they been beaten down thanks to interest-rate headwinds, but the wave of high-profile bankruptcies, store closures, and generally difficult operating environments has put pressure on any investment related to retail.

This is true even for companies such as Realty Income, which has little exposure to the troubled parts of retail. While the REIT sector has been roughly flat over the past year, Realty Income is down 11%.

O Chart

O data by YCharts

However, this could be an opportunity to scoop up one of the market's best dividend stocks at a bargain. Realty Income yields 4.8% as of this writing, and has made 569 consecutive monthly dividend payments to shareholders. Perhaps even more impressively, the dividend has been increased for 81 consecutive quarters, and the stock has generated a 16.3% annualized return since its 1994 NYSE listing.

Realty Income's business model allows for this consistency and predictability. The company's tenants sign long-term net leases, generally with initial terms of at least 15 years and annual rent increases built right in. And the vast majority of Realty Income's retail tenants operate businesses with a non-discretionary, service-oriented, or low-price component -- three areas of retail that are actually doing quite well.

Recession-resistant properties and strong growth tailwinds

Welltower is the largest REIT specializing in healthcare properties, and most of the company's portfolio is in senior-focused properties. Eighty-three percent of Welltower's portfolio is made of senior housing and long-term/post-acute care properties, with the rest composed of outpatient medical offices.

So why healthcare real estate? For one thing, it's a recession-resistant form of real estate. When times get tough, people can stop going to the mall, staying in hotels, or keeping their things in a self-storage facility. Healthcare, on the other hand, isn't seen as an optional expense, especially for seniors. Plus, 93% of the tenants' revenue is private-pay, as opposed to being dependent on government reimbursements.

Furthermore, there should be steady growth opportunities ahead. The U.S. senior citizen population is expected to grow rapidly in the coming decades, especially in the oldest age groups. For example, the 85-and-older population is expected to double in the next 20 years, and this is the group that typically uses senior housing the most.

Chart of projected growth in 85-and-older population.

Image source: Welltower earnings presentation.

The urban rental market is strong

Apartment REIT Equity Residential owns a large portfolio of high-quality apartments in several key urban growth markets -- specifically New York City, Boston, Washington D.C., Seattle, San Francisco, and Los Angeles, among others. The company currently has 305 properties with a total of more than 78,000 apartments.

The portfolio is concentrated in markets that are expensive to buy a home in and that are also difficult for competitors to build in. All of Equity's key markets have higher than average concentrations of younger (25-34) professionals and have delivered 50% faster rent growth than the U.S. average since 2003.

Instead of simply buying and holding properties, Equity Residential's investment strategy is to constantly assess growth opportunities, selling lower-growth assets and using the proceeds for assets likely to provide higher growth. The company also invests in high-return enhancements, such as kitchen and bath renovations, which tend to yield 12%-15% returns.

You may notice that Equity pays the lowest dividend of the three stocks mentioned here (although I wouldn't call a 3.3% yield low) and also trades at the highest P/FFO valuation. Well, first of all, the company's dividend is well covered by its earnings. The current payout represents 82% of 2017's expected FFO, modest for a REIT, and the company plans to continue to grow the dividend. And second, Equity's quality warrants somewhat of a premium. The company has an excellent balance sheet and the highest (A-/A3) credit rating of the three REITs discussed here.