If you are a dividend investor and you have some cash (let's say $1,000) you want to put to work, you might want to take a look at real estate investment trusts (REITs). There are some good reasons to consider them (explained below) and some good reasons to consider buying now.
REITs like W. P. Carey (WPC -1.70%) and Broadstone Net Lease (BNL -0.14%) have attractive yields today, and both are likely to be attractive long-term investments worthy of that $1,000 buy-in. Here's why.
The sting of rising rates
REITs have to compete for investment dollars with other income options, including super-safe choices like bank CDs. When interest rates go up, as they have been for a year or so, investors can earn more by parking cash in safe places. That reduces demand for stocks like REITs, which are specifically designed to pass income on to investors. REITs inherently involve market risk, so if you can get a safe CD yielding as much as a REIT, you might opt for the CD.
Reduced demand pushes down REIT prices, increasing yields to the point where investors are willing to take on the added risk. Over the past year, W. P. Carey and Broadstone saw their stock prices fall more than 20%, underperforming both the average REIT (as represented by the Vanguard Real Estate ETF) and the broader market (as represented by the SPDR S&P 500 ETF).
Adding to the complexity here is that REITs grow by buying properties. The swift rise in rates has left buyers and sellers farther apart when it comes to setting property prices. So there's not a lot of activity in the market, leading to growth concerns for REITs like W. P. Carey and Broadstone. However, rates will stop rising at some point, and this pair of REITs will have an opportunity to shine again. If you buy now, you can lock in fairly attractive dividend yields of around 6.8% for Broadstone and 6.4% for W. P. Carey.
Plenty of levers to pull
What sets W. P. Carey apart from most of its peers is its broad diversification. While many REITs focus on one sector or region, W. P. Carey goes in exactly the opposite direction. Its portfolio includes industrial (29% of rents), warehouse (24%), office (17%), retail (16%), and self-storage (4%) assets, with a fairly large 10% in "other." On top of that, it generates roughly 39% of its rents from outside the United States, mostly from Europe.
This is important because it allows W. P. Carey to invest in the areas where it sees the best opportunities. But with exposure to so many sectors and geographies, it simply has a bigger playing field than most of its competitors. The office exposure has investors worried right now, given the lingering work-from-home trend. But while retail-focused REITs were muddling through the social distancing headwinds in the early days of the coronavirus pandemic, W. P. Carey quickly pivoted to industrial assets, where demand was picking up.
Diversification has been more of a positive than a negative over the company's history. Indeed, W.P. Carey has increased its dividend annually since its 1998 IPO, a record that could only be built with a successful operating model. If you like optionality, you'll want to get to know this high-yield REIT.
Building the dry powder
Broadstone is a fairly young and small REIT, only going public in late 2020. As 2023 got underway, the rising interest rate environment led management to pull back on the acquisition front. Basically, sellers were clinging to historical prices despite the rising rate environment, and Broadstone is unwilling to overpay for assets. But it has been selling into the market to investors that are willing to pay elevated prices. Through the first half of 2023, the company actually sold more properties than it bought.
On the surface that means the REIT is shrinking, which isn't good. But step back and think about this from a different perspective. Would you want management to overpay just so it could say it was growing the portfolio? The answer is probably no.
Meanwhile, the cash that it's generating from asset sales today will give the company extra cash to invest when property prices are more rational. That dry powder will help boost growth down the line, and it shows that management is being prudent with its shareholders' money. Which is probably what you would want the management team to do.
Time for a deep dive
No stock is perfect, so you'll want to get to know W. P. Carey and Broadstone a little better before you buy them. But each of these high-yield REITs has attractive opportunities ahead of it. It's just that right now there are a lot of moving parts, mostly out of their control, that are holding them back. When interest rates stabilize and property markets normalize, these two REITs are likely to attract the attention of investors again. Buying now will let you get ahead of the pack and lock in big yields.
