Higher dividend yields often imply that the underlying company paying the dividend has a higher risk profile. However, that's not always the case. Some companies offer high-yielding dividends on an extremely safe footing. That's especially true of many real estate investment trusts (REITs) where the average dividend yield is over 4% compared to 1.6% for the S&P 500.
Three higher-yielding REITs that stand out for their safety are Equity Residential (EQR 0.90%), Public Storage (PSA 0.04%), and Realty Income (O 1.94%). That quality makes them great passive income investments for risk-wary investors.
Built on a strong foundation
Equity Residential is one of the country's largest apartment landlords. It holds 308 properties with nearly 80,000 apartment units across several major cities along the coasts and in the Sun Belt -- a large-scale, diversified portfolio that helps reduce risk.
Meanwhile, demand for apartments is tremendously durable because people need affordable housing. That allows Equity Residential to produce especially steady rental income throughout the economic cycle. This stable cash flow gives it the money to cover its 4.3%-yielding dividend.
The apartment REIT pays out 75% of its funds from operations (FFO) in dividends. That's a conservative dividend payout ratio for a REIT, enabling Equity Residential to retain cash to invest in expanding its apartment portfolio.
The company also has a top-tier balance sheet with an A-/A3 bond rating, making it one of only a handful of REITs with A-rated credit. It backs that rating with incredibly low leverage ratios and lots of liquidity, giving it even more financial flexibility to expand its portfolio. The company's financial strength also puts its dividend on an exceptionally firm foundation.
A remarkably secure dividend
Public Storage is one of the largest self-storage REITs. It owns about 2,900 locations in the U.S., with almost 205 million square feet of rentable space leased to roughly 1.8 million customers. That large-scale portfolio helps reduce risk.
Meanwhile, demand for self-storage space has proven to be highly recession-resistant. People and businesses have a lot of stuff and often need space to store it, enabling Public Storage to generate stable rental income to pay its 4.2%-yielding dividend.
Public Storage recently boosted its dividend by 50%. The company can easily afford that much-higher payout level. This year, its dividend payout ratio should be in the low-70% range. This conservative payout ratio gives it a big cushion while allowing it to retain lots of cash to fund new investments. The company further supports its dividend with an exceptional A/A2 credit rating, enhancing its financial flexibility and putting its dividend on a secure foundation.
A rock-solid REIT
Realty Income owns a fairly well-diversified portfolio of income-producing commercial properties. While it focuses on properties leased to companies in the retail industry, it also owns industrial properties, agricultural facilities, gaming properties, and consumer-centric healthcare facilities. Realty Income concentrates on owning properties leased to tenants that can withstand economic downturns and the pressures of e-commerce. Because of that, it generates stable rental income to cover its 4.9%-yielding dividend.
The REIT has a very reasonable dividend payout ratio of around 75%. Again, that gives it a nice cushion while allowing it to retain significant cash for reinvestment. Realty Income also boasts A-rated credit, further enhancing its financial flexibility and putting its payout on rock-solid ground.
Rest easy with these REITs
REITs can be an excellent way to generate passive income because most offer high-yielding dividends. Equity Residential, Public Storage, and Realty Income stand out as three of the safest payouts in the sector. They generate exceptionally stable rental income, pay out a conservative portion via dividends, and have elite balance sheets. That makes them extremely safe options for those seeking durable passive income.
