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3 Stocks to Supplement Your Social Security Income

By Brent Nyitray, CFA - Apr 29, 2021 at 6:41AM

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Looking for income? Consider real estate investment trusts.

Social Security income can be a welcome arrival every month, but investors may want a little more to supplement it. If you're looking for additional income that's steady without sacrificing the possibility of gains, you might want to try the real estate investment trust (REIT) sector. REITs are required by law to distribute most of their income as dividends (if they meet that requirement, they don't have to pay corporate taxes). And the businesses they focus on are usually tailor-made for consistent cash generation.

Here are some REITs that may be good investments for an income-minded investor, specializing in essential services like drugstores and dollar stores, the growing mobile-data industry, or highly conservative government-guaranteed securities.

Photo of a calculator, a sticky note that says dividends and a roll of money

Image source: Getty Images.

A Dividend Aristocrat that's been through many economic cycles

Realty Income (O 2.77%) is an excellent candidate for a retiree's portfolio. It leases single-tenant commercial properties to stable, high-quality businesses, and its triple-net-lease model means those tenants are the ones who take care of things like taxes, insurance, and maintenance. While many retail establishments fell on hard times early in the pandemic due to government-enforced lockdowns, most of Realty Income's tenants were considered essential businesses and stayed open. Its biggest tenants include Walgreens, 7-Eleven, FedEx, and Dollar General. While Realty Income did have some exposure to struggling industries like movie theaters and restaurants, its occupancy rate at the end of 2020 was 97.9%.

As a result, while most retail REITs were forced to cut their dividends last year, Realty Income raised its monthly dividend four times. It's a classic Dividend Aristocrat -- an S&P 500 company that's raised its dividend at least 25 years in a row. And it's been in business since 1969, so it has been through a lot of economic cycles. At Wednesday's prices, Realty Income's monthly $0.235 dividend gives the stock a yield of 4.1%. 

Cell phone towers are a long-term business

American Tower (AMT 1.10%) is a REIT that's in the business of leasing cellphone towers. Its leases are generally to mobile phone providers like AT&T and T-Mobile, and they typically last for terms of 5-10 years, with automatic escalators. In many ways, American Tower's model resembles Realty Income's in that it concentrates on the biggest, most stable tenants. The market for cellphone towers in the U.S. is more or less an oligopoly, with American Tower and Crown Castle as the two heavyweights, with SBA Communications a distant third. It would be extremely difficult for a new entrant to usurp American Tower's position given the coverage already in place and its long-term contracts.

American Tower is one of the few companies out there that combine both income and growth, as its stock has risen more than 140% over the past five years without factoring in dividends. There is a long-term story, as well, with mobile devices consuming more and more data. This year, the company has guided for $9.20 per share in adjusted funds from operations (FFO, what most REITs use for earnings) and said that it intends to hike its dividend 15%. Note that the company raised its dividend every quarter in 2020. At current levels, it pays a 2% yield. 

Mortgage REITs pay some of the highest dividends in the market

AGNC Investment Corp. (AGNC 3.70%) is a mortgage REIT that invests almost exclusively in mortgage-backed securities guaranteed by the U.S. government. This means that if the borrower stops paying his or her mortgage, the government will ensure that AGNC still gets paid. While AGNC bears little credit risk, it does bear interest rate risk; however, it uses instruments to help hedge against that risk.

Last year was particularly difficult for the mortgage REITs, as the financial markets seized up in the early days of the COVID-19 pandemic. The market for mortgage-backed securities became illiquid (and even disappeared for non-government-guaranteed securities). Most mortgage REITs were forced to cut their dividends, and AGNC was no exception; however, it said afterwards that the cut might have been unnecessary in retrospect. AGNC's 25% cut in the dividend was one of the lowest in the mortgage REIT sector.

Mortgage REITs generally trade right around book value, and for an agency REIT like AGNC, book value is generally slow-moving. The main attraction for these stocks is their dividend yields, which can be some of the highest in the stock market. AGNC pays a monthly dividend of $0.12 per share, which gives the company an 8.3% yield. It's usually wise to be skeptical of super-high yields, but when high yields are common in a given industry, the steadiest companies can be worth a look. AGNC fits the bill.

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Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$70.15 (2.77%) $1.89
AT&T Inc. Stock Quote
AT&T Inc.
$21.31 (1.67%) $0.35
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$38.56 (1.74%) $0.66
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
$136.81 (1.69%) $2.27
AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
$11.48 (3.70%) $0.41
Crown Castle International Corp. Stock Quote
Crown Castle International Corp.
$172.36 (2.36%) $3.98
FedEx Corporation Stock Quote
FedEx Corporation
$223.61 (-1.37%) $-3.10
American Tower Corporation Stock Quote
American Tower Corporation
$258.40 (1.10%) $2.81
Dollar General Corporation Stock Quote
Dollar General Corporation
$246.35 (0.60%) $1.46
SBA Communications Corporation Stock Quote
SBA Communications Corporation
$330.46 (3.25%) $10.41
Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
$0.45 (4.20%) $0.02
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
$0.43 (3.55%) $0.01

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

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