Finding steady and meaningful income in the current market environment has been difficult for some investors. Stocks are near record highs, interest rates are low, and inflation is rising. It's a tough combination to overcome.
One traditional path has been through Real Estate Investment Trusts (REITs), which have always been good candidates for income investors. This is because REITs are designed to avoid taxation at the corporate level as long as they limit their business activities and pay out most of their earnings as dividends. The best REITs do this very well.
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Let's look at two interesting REITs that every income investor should try and take time to understand and consider adding to an income portfolio.
1. Realty Income raised its dividend 3 times in 2020
Realty Income (O +0.24%) is a real estate investment trust (REIT) that invests in single-tenant real estate. These leases are made to the highest-quality tenants using a triple-net lease model, which means the tenant pays taxes, insurance, and some of the upkeep on the property along with the usual rent. These leases are generally longer-term and include annual rent escalators. Roughly half of Realty Income's tenants are investment-grade entities, and most operate in highly stable industries. Realty Income's tenants include drug stores, dollar stores, and logistics companies.
During the COVID-19 pandemic, Realty Income was affected much less than most REITs, especially those focusing on more discretionary retailing like the shopping malls. Most of Realty Income's tenant base was considered an essential business, and closures were limited to service tenants like movie theaters, gyms, and education-related operations. Realty Income pays a monthly dividend and is one of the classic Dividend Aristocrats, an elite group of S&P 500 companies that have increased dividends annually for at least 25 consecutive years. Despite the COVID-19 pandemic in 2020, Realty Income raised its dividend three times. At its current price, Realty Income's dividend yields 4.3%.
2. If inflation remains strong, Weyerhaeuser could benefit
Weyerhaeuser (WY 0.72%) is an interesting dividend story. It pays a normal quarterly dividend and then does a special variable dividend every year, with the inaugural dividend coming in early 2022. As anyone who has built anything over the past year knows, lumber costs were on a tear over the summer as supply chain issues limited availability. Weyerhaeuser is a timber REIT that owns or manages 24.8 million acres of timberland in the United States and Canada. It also manufactures wood products for construction. Residential home construction is a big driver of Weyerhaeuser's business, and there is a major shortage of housing in the United States, which should drive the business going forward.
Weyerhaeuser has an unusual dividend structure, in which it pays a quarterly base dividend, which is intended to be steady throughout the entire business cycle. In other words, even if demand is low or lumber prices fall, it should be able to cover the quarterly dividend. In addition, Weyerhaeuser pays a variable dividend, which will be based on the prior year's results. Weyerhaeuser will pay its first variable dividend early in 2022. It is too soon to tell how much it will be. However, high lumber prices have boosted Weyerhaeuser's results this year. The company's base dividend of $0.17 per share gives it a yield of 1.7%, though Weyerhaeuser paid a special dividend of $0.50 a share in October as well. Investors who like the housing story and are comfortable with a base yield of 1.7% (which is somewhat low for a typical REIT) might find Weyerhaeuser's somewhat unique dividend model attractive.
