Is it possible to find a stock that pays a sustainable yield of 5% or more and has upside potential? It's an elusive combination, but one that can produce total returns that handily beat the market over time.
There are a few stocks right now that offer both of those attributes, and in my view, Simon Property Group (SPG 0.38%), Healthpeak Properties (PEAK 0.99%), and AT&T (T -0.13%) are among them. Here's why investors might want to take a serious look at adding these companies to their portfolios.
Some malls are in trouble, but this company will be just fine
When it comes to malls, some operators are certainly struggling. At least two major mall real estate investment trusts (REITs) are in serious danger of going bankrupt as I write this, and many mall tenants have been hit hard by the COVID-19 pandemic.
However, Simon Property Group is in a class by itself. Not only is it the largest mall operator in the United States, it is also the most financially stable with $8.5 billion of liquidity (including $3.6 billion in cash on hand). Not only does this mean it has a nice cushion to get through the tough times, but it also allows Simon to reinvest in its properties more than peers, and that's what gives it a big competitive advantage.
Simon has been adding more mixed-use elements to its malls, such as entertainment venues, hotels, and office spaces. The idea is that these diversify its revenue stream and create new sources of foot traffic for retailers. The proof is in the numbers -- although retail as a whole has been struggling for years, Simon retailers actually reported 4.8% sales growth in 2019.
Even at the temporarily reduced dividend rate of $1.30 per quarter, Simon Property Group yields nearly 8% at its current stock price. And if you're worried about the company being able to sustain this payout, don't be. Even during the pandemic-necessiated shutdowns of the second quarter, the company generated $2.12 in funds from operations (the REIT version of earnings).
A great way to play this trillion-dollar market
Healthpeak Properties is a real estate investment trust that specializes in healthcare real estate. The company owns more than 600 properties, and its rental income comes from a roughly even mix of senior housing, life sciences, and medical office properties, giving the company a diversified footprint within the sector that most of its peers don't have. In recent years, Healthpeak has taken steps to increase its asset quality and improve its balance sheet, and is now starting to get into growth mode once again.
There's no question that the U.S. healthcare industry's physical space needs are going to keep growing. The older segments of our population are growing the fastest -- the number of people 65 and older is expected to roughly double in the next 35 years. Older Americans utilize healthcare services more frequently, and spend more money when they do.
And that doesn't even take the current opportunity into account. Healthcare real estate is a $1.2 trillion market in the United States, and it's a highly fragmented sector in which only about 15% of the properties are owned by REITs, which should give Healthpeak tons of room to grow.
Don't count out this telecom giant
To be sure, AT&T has made its share of missteps over the years. It clearly overpaid for DirecTV and is likely to sell the satellite TV provider at a massive loss. And the recent Time Warner acquisition left the company with an unsettling amount of debt.
However, don't count this 7.3%-yielding company out. For one thing, the recent introduction of the HBO Max streaming service is showing some impressive early results, and has lots of growth potential. Plus, the rollout of 5G technology is finally upon us, which could give AT&T a nice tailwind for the next few years as demand for high-speed wireless connectivity grows. And finally, the company is already making progress in shoring up its balance sheet; its ongoing efforts to lighten its debt burden could be a positive catalyst.
AT&T has a 36-year streak of annual dividend increases, and I don't see management letting it end anytime soon. The company is generating more than enough cash to cover its dividend, buy back stock, and pay down its debt. This is a high-dividend stock that patient investors should really consider adding to their holdings.
Buy for the long term
As a final thought, it's important to emphasize that none of these are low-risk stocks, especially in the near term. In the case of Simon Property Group, the full economic effects of the COVID-19 pandemic on mall traffic and retail tenants won't be clear for some time. Healthpeak's senior housing properties aren't exactly faring well, and it could be years before that industry returns to normal. And AT&T faces a ton of execution risk in its plans to reduce debt and compete in the streaming-video world.
These headwinds could cause significant volatility for the stocks in the near term, but all three could be excellent value investments for investors who have a relatively high risk tolerance and the patience to ride out the ups and downs.