An S&P 500 index ETF currently offers a scant 1.65% dividend yield, not much to write home about if you are a dividend investor. This is why dividend investors might want to consider real estate investment trust (REIT) W.P Carey's (WPC 0.05%) 5% yield or Omega Healthcare's (OHI -0.46%) 9.5%, instead. But those same investors shouldn't get greedy, because Global Net Lease's (GNL -0.42%) 11.5% yield is a huge risk.

Here's what dividend investors need to know about this trio of ultra-high-yield stocks before you start buying.

Some REITs give off warning signs

Global Net Lease is a net lease REIT, which means it owns single-tenant properties for which its lessees pay most of the operating costs. In general, net-lease REITs offer a fairly low-risk investment approach in the REIT sector, assuming the REIT has a large enough portfolio. Global Net Lease owns 310 properties, so it's not huge, but it's not exactly small, either. It has assets in 11 countries, mostly in North America and Europe. So far, so good.

A bear trap with money sitting inside of it to suggest material financial risk.

Image source: Getty Images.

Big problems arise after digging in a little deeper into Global Net Lease's operations. For starters, Global Net Lease is externally managed. Although not inherently bad, it can create situations where management's incentives don't align with what shareholders care about. Notably, AR Global, the advisor, runs other REITs that may like to buy the same types of assets that Global Net Lease invests in.

According to Global Net Lease's 10-K, "The variable portion of the base management fee payable to the Advisor under the advisory agreement increases proportionately with the cumulative net proceeds from the issuance of common, preferred or other forms of equity by us." Essentially, getting bigger for the sake of getting bigger is a net benefit to the advisor even if it isn't in the best interests of shareholders.

The risks of this showed up in 2020 when the dividend was cut by 25%. Worse, third-quarter adjusted funds from operations (FFO) was $0.40 per share and the dividend was $0.40 per share, meaning the adjusted FFO payout ratio is a worryingly high 100%. Even with an 11.5% dividend yield, the risks here probably aren't worth it.

Playing it safe means seeking out diversity

If you are interested in a net lease REIT with a global portfolio, you'll be much better off ratcheting down the risk and buying W.P. Carey. The yield is more modest at around 5%, but the dividend has increased annually since the REIT's IPO in 1998. That includes hikes during the dot.com bubble, the Great Recession, and in 2020 when the coronavirus pandemic pushed Global Net Lease into a dividend cut. For reference, the average REIT, using Vanguard Real Estate Index ETF as a proxy, yields around 3.9%. So W.P. Carey's yield is still very attractive relative to that of other REITs.

The company's portfolio is spread across North America and Europe but includes more than 1,400 properties. Perhaps most important, however, in the third quarter of 2022 adjusted FFO came in at $1.36 per share compared to dividends of $1.061 per share. That's an adjusted FFO payout ratio of around 78%, which leaves far more room to deal with potential adversity. If you like to sleep well at night, W.P. Carey is a much better option than Global Net Lease.

Taking on a bit more risk

If you are looking for a yield of more than 5%, however, you might want to shift gears and consider healthcare REIT Omega Healthcare. It uses the net lease approach, but it is highly focused on nursing homes. This has not been an easy asset class to own since the coronavirus pandemic started to spread globally in 2020. In fact, after a long string of annual dividend increases, Omega stopped hiking in 2020 -- but it didn't cut the dividend, either.

The REIT works hard to deal with troubled tenants, selling assets, reworking leases, and changing tenants to improve its portfolio. It has been touch-and-go at times, but the third-quarter adjusted FFO payout ratio was 88%. Given the ongoing headwinds in the senior housing space, that's a figure to worry about, but there's still some leeway for adversity. And management has clearly shown a commitment to maintaining the payment.

Meanwhile, the 9.5% yield isn't actually out of line with the historical yield range, suggesting that investors are reasonably confident that the REIT will muddle through the current headwinds without a dividend cut. Given that the world is three years into the pandemic, that seems like an increasingly worthwhile bet.

Different risks, different rewards

Most investors should probably avoid Global Net Lease, given its modest portfolio, external manager, and high adjusted FFO payout ratio. W.P. Carey is a much better choice, though you will have to give up yield for safety. Omega Healthcare, which uses the net lease approach in the healthcare property niche, is somewhere in between those two risk-wise. But, unlike Global Net Lease, it has a more modest adjusted FFO payout ratio and a clear dedication to sustaining the distribution.