Dividend Aristocrats are an elite group of dividend-paying S&P 500 stocks that have long histories (a minimum of 25 consecutive years) of increasing dividends year after year. Real estate investment trusts (REITs) are investment vehicles specifically designed to pay out dividends and generally have outsized dividend yields. If a REIT invests in real estate and distributes most of its income as dividends, it's exempt from paying corporate income taxes.
Investors who are interested in building income portfolios should consider finding investments that incorporate both strategies -- consistent increases in payouts and an above-average yield. Here are two REIT-based Dividend Aristocrats that do this and both are worth a closer look.
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1. Essex Property Trust: Benefitting from rising West Coast real estate prices
Essex Property Trust (ESS 2.31%) is an apartment REIT that focuses on the West Coast markets of Southern California, Northern California, and Seattle. It develops buildings in areas that have over 1 million in population, constrained real estate supply, a strong economy, and expensive single-family housing.
The West Coast, in particular, has seen rapid single-family home-price appreciation over the past several years. According to the FHFA House Price Index, West Coast housing markets rose 19.4% last year.
Essex Property Trust owns 252 apartment communities consisting of 61,911 units. While occupancy increased in 2021 (compared to 2020), the company offered some pandemic-related concessions to maintain occupancy levels (typically, a temporary lower rent payment or free rent). These concessions kept occupancy levels high and maintained most rental revenue, but the same-store revenue metric did take a hit. Essex Property is at the tail end of this special offer, and rents should reset upward as they catch up to current market prices. This will likely push earnings higher going forward.
Essex just hiked its quarterly dividend from $2.09 per share to $2.20. This gives the company a dividend yield of 2.5%.
Essex Property Trust earned $12.49 in funds from operations (FFO) per share last year. FFO per share is a better indicator of a REIT's earnings than earnings per share because depreciation (a non-cash hit to earnings) is such a major component of earnings. Based on last year's per-share dividend of $8.36 and FFO per share of $12.49, the company has a payout ratio (or the amount of earnings that get distributed as dividends) of 67%, which is on the low side for a REIT. This indicates that Essex is reinvesting cash back into the business.
2. Realty Income: A stalwart performer over the long term
Realty Income (O 0.52%) is a classic Dividend Aristocrat. It's been in business since the late 1960s and has weathered all sorts of economic shocks to maintain its ability to consistently raise its dividend year after year.
Realty Income develops single-tenant properties and rents them out to high-quality businesses under long-term "triple net" leases. You may be familiar with a gross lease, which is the most typical lease out there and resembles an apartment lease. In this situation, the tenant is responsible for paying the rent and utilities, but the landlord covers maintenance, taxes, insurance, etc.
Under a triple-net-lease arrangement, the tenant is responsible for most of the costs. Triple-net leases are typically longer-term and contain automatic annual rent increases. Given the financial commitment these require, they're typically reserved for investment-grade tenants.
While many REITs struggled during the pandemic, Realty Income fared better than most -- primarily due to the highly defensive nature of its tenant base. Unlike mall REITs, which house consumer-discretionary retailers, Realty Income focuses on consumer non-discretionary businesses like drug stores, convenience stores, and dollar stores.
These businesses were considered essential during the pandemic and were permitted to stay open. Realty Income didn't escape the pain completely -- its theater and fitness center clients were hit hard, but those properties are now up and running as well.
Realty Income pays a monthly dividend, and the REIT hiked it three times just in the past year. At current stock prices, it has a dividend yield of 4.4%. As one of the original Aristocrats, Realty Income is a great core holding for any income investor's portfolio.
