There's a trade-off on Wall Street with which every dividend investor needs to come to terms: risk versus reward. When you see a giant yield, it most likely means there's also giant risk involved in the investment. But that doesn't mean you can't find attractive, though not giant, yields from real estate investment trusts (REITs) that have increased their dividend for decades. Here are three of the best REITs for low-risk investors, and each has a yield that's more than twice that of the S&P 500 Index.
1. The king
The undisputed Dividend King of REITs is Federal Realty (FRT), with a huge 54 consecutive annual dividend hikes under its belt. It is the longest streak of any REIT. The current dividend yield is roughly 3.3%. Compared to the S&P 500 Index's 1.3% yield, that's pretty generous, noting that despite the headwinds this retail landlord saw in pandemic-hit 2020, it still managed to increase its dividend.
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The key is that Federal Realty focuses on quality over quantity when it buys strip malls. Indeed, with only around 106 properties, it's pretty small, but the locations are so strong that even during the pandemic downturn, it was fielding calls from retailers looking to upgrade from nearby locations. The REIT also puts a lot of effort into redeveloping its assets to maximize the rent they generate and grow its top and bottom lines.
This brings up the most exciting thing here: Federal Realty bought a handful of new properties during the downturn, giving it additional growth levers in the years ahead. That includes adding a new region (Phoenix) to its opportunity set.
Federal Realty will never be a really exciting REIT, and the yield will rarely be huge, but if a slow and steady dividend payer is your speed, you'll want to keep an eye on this one.
2. Bigger and better
Realty Income (O 0.52%) is the next REIT up here. The company owns single-tenant net lease properties, which means the tenants are responsible for most of the costs of the properties they occupy. Spread over a large portfolio, it's a pretty low-risk way to invest in real estate.
This helps explain why Realty Income has increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat. The dividend yield is 3.98%. And the dividend is paid monthly, which makes it easier to deal with budgeting for those looking to live off of their dividends.
However, the most exciting thing right now is that Realty Income has just stepped up its game, using its acquisition of VEREIT to increase its portfolio from around 6,600 properties to over 10,000. In the net lease sector, scale provides a number of benefits.
For example, the investment-grade rates REIT has access to cheap capital, the heft to take on deals that its peers couldn't manage, the ability to spread its costs over more properties, and enough diversification in its portfolio that no tenant or sector niche should be too problematic, even in a downturn.
On that note, the REIT increased its dividend four times in 2020. If you want to own the biggest and the best, Realty Income has to be on your list.
FRT Dividend Yield data by YCharts.
3. The all-in-one
W.P. Carey (WPC 0.27%) is the last name on this list, with a generous yield of 5.4%. While it isn't a Dividend King or a Dividend Aristocrat, it has increased its dividend every year since its initial public offering in 1998. And, like Realty Income, it hiked the payout every quarter in 2020.
The key here is that W.P. Carey, which is also a net lease REIT, has long been an opportunistic investor, putting money to work where it sees the best opportunities. That investment approach has led to a uniquely diversified portfolio, spread across the industrial, warehouse, office, retail, and self-storage sectors, and across geographies, with roughly 37% of rents coming from outside the United States (mostly Europe).
It is probably one of the most diversified REITs you can buy, which makes it somewhat of a one-stop shop for investors looking to own a single REIT. It doesn't have the scale that Realty Income offers, but that hasn't stopped it from achieving a pretty incredible dividend record. And given its generous yield compared to Realty Income and the broader market, it looks relatively attractive today.
The ones to own
Federal Realty and Realty Income both tend to be afforded premium prices by investors most of the time. That includes today, which means that value-conscious investors will probably find them less than appealing. However, if your goal is reliable income from a relatively low-risk investment, both are worth a deep dive.
Meanwhile, W.P. Carey has been cheaper in the past, but still looks pretty attractive, given its above-peer dividend yield and strong dividend history. Most income investors will probably find it appealing right now.
