Dividends can provide an important source of investment income to a well-diversified portfolio. However, as with any investment, you need to take prudent steps to ensure that the dividend stock you are considering is actually a good choice.
Merely investing in the highest-yielding stocks is not enough. It's important to do your homework and know why a stock's yield looks attractive. The yield could be high because the stock price has fallen significantly. Or it could be high because management is making poor decisions about how to distribute its excess earnings. Or the excess earnings have fallen, but management isn't adjusting the dividend to match the new lower earnings levels.
Fortunately, there are companies that are doing it right and earning enough to bump up the yield and reward shareholders. Let's discuss three real estate investment trusts (REITs) that dividend-seeking investors should consider adding to their portfolios.
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1. American Campus Communities
American Campus Communities (ACC) is a large owner of student housing. While the REIT's earnings were hurt by the pandemic, which forced many colleges to send students home, this is a resilient business that more often has steady occupancy.
In fiscal 2021's first quarter, American Campus's revenue fell by about 7% year over year to $232.7 million, and its adjusted funds from operations (FFO), a key metric used by REITs, dropped by 19%. But the company did collect over 97% of the rent due.
However, management saw improvement in leasing activity for the fall semester, and I am optimistic that occupancy levels will increase as COVID-19 vaccines get administered. Colleges increasingly require students to receive the vaccine to attend in-person classes.
While American Campus Communities kept its quarterly dividend the same last year at $0.47 per share, it didn't cut the payment as many other REITs did during the pandemic. That works out to a 4.1% dividend yield.
2. Medical Properties Trust
Medical Properties Trust (MPW 4.61%) leases its properties to healthcare companies. Three-quarters are general acute-care hospitals, and the rest are emergency care facilities, rehab facilities, specialty care hospitals, and behavioral health properties. Since people need care no matter the state of the economy, Medical Properties Trust is in a good position to continue collecting rents.
You can see this by looking at its results. Fourth-quarter revenue was $333.8 million, up more than 30% year over year, and adjusted FFO was up by 22%.
Medical Properties Trust typically increases its quarterly dividend modestly every year, and the company hasn't disappointed recently. The board of directors raised April's payment by a penny to $0.28 per share, which works out to a yield of 5%.
3. Realty Income
If you're looking for frequent dividends, Realty Income (O 1.46%), which makes monthly payments, fits the bill. It rents its nearly 6,600 properties primarily to retailers. While the retail industry has been besieged by online competition such as Amazon, Realty Income offsets this risk by renting to large, financially strong companies like Walgreens Boots Alliance, Dollar General, and Walmart.
Despite the pandemic hurting its movie theater tenants (5.6% of annual rent), Realty Income's occupancy was about 98% at the end of 2020, and fourth-quarter rent collections were almost 94%. Q4 revenue grew by over 5% year over year to $418.1 million, driving adjusted FFO 5.6% higher.
Realty Income has a history of increasing dividends annually, having done so for more than a quarter of a century, making it a Dividend Aristocrat. In January, the company raised the monthly dividend payment from $0.234 to $0.235 per share. The yield works out to 4.1%.
Investor takeaway
These three REITs offer significantly higher yields than the S&P 500's average of 1.4%. Although their businesses are different, they each have strong properties in student housing, healthcare, and retail. This allows them to do well in a variety of environments, ensuring shareholders keep receiving their payments for a long time.
