Higher-yielding dividend stocks are often a higher risk. The bigger payout is an investor's reward for assuming more risk, including that it could get cut if the company's situation deteriorates further.

Investors in SL Green Realty (SLG -0.53%) have seen that risk firsthand. The office REIT has already cut its dividend once and could reduce its payout, currently yielding nearly 10%, again. Income-focused investors should avoid this REIT for now.  

Instead, they should consider buying EPR Properties (EPR -0.32%) and W.P. Carey (WPC -1.70%). They offer ultra-high-yielding dividends that are on much firmer foundations.

Mounting headwinds could cause another dividend cut

SL Green Realty is the largest office landlord in Manhattan. It's facing tremendous pressure these days from falling office demand and rising interest rates. These issues forced the REIT to reduce its dividend by 12.9% earlier this year. 

Another dividend cut could be forthcoming. Office demand remains tepid following the pandemic. Occupancy across its office portfolio was 89.8% at the end of the second quarter, down from 92% in the year-ago period. Rental rates are also under pressure. Rents on new leases signed during the second quarter were 2.2% lower than the prior rates on the same space. Meanwhile, interest rates have risen sharply, causing interest expenses to rise. 

These issues have impacted SL Green's cash flow and balance sheet. The REIT has the highest leverage ratio in the office sector, which is becoming increasingly problematic since it will be hard to refinance that debt. That's leading the company to sell assets to repay debt. While it has made good progress on asset sales, it might need to cut the dividend again and allocate that cash flow toward debt reduction. Given the risk of another cut, income-focused investors should avoid this office REIT for now.

A win-win outcome

EPR Properties has also felt the lingering impacts of the pandemic. The REIT focused on experiential real estate has had issues with its theater tenants. Notably, the parent company of one of its top tenants (theater operator Regal Entertainment) filed for bankruptcy last year. That caused some uncertainty about the future of its 57 property leases with that tenant.

The companies recently reorganized their leases, lifting the curtain of uncertainty. The new agreement will cover 41 properties, with EPR taking back the other 16 locations. It found new operators for five properties and will sell the remaining 11. The new deal will enable EPR to recover 96% of the pre-bankruptcy rent next year, which is a great outcome. Meanwhile, it could see further recovery by reinvesting the sale proceeds into additional non-theater properties. 

The deal gives EPR Properties more visibility into its future cash flows, which will cover its dividend (currently yielding 7.7%) with room to spare. That's enabling it to retain additional cash to fund its diversification strategy. EPR expects to invest $200 million to $300 million into acquiring and developing non-theater experiential real estate this year. It has already invested $98.7 million through the first half of this year and has committed to investing $224 million over the next two years on development and redevelopment projects. 

These investments should grow its cash flow, further supporting its attractive dividend. It also has a solid investment-grade balance sheet, including $99.7 million of cash and an undrawn $1 billion credit facility. Meanwhile, it has limited maturing debt (none in 2023 and only $136.6 million due next year). These factors put its dividend on a solid foundation. 

Well insulated from the headwinds

W.P. Carey is a diversified REIT that owns warehouses, light manufacturing facilities, retail properties, offices, and self-storage facilities. While the REIT does have some exposure to the office sector (16% of its rent), that's declining as it expands its industrial portfolio. Meanwhile, most of its offices are operationally critical properties (e.g., corporate or regional headquarters) secured by long-term net leases.

The company's diversified real estate portfolio supplies it with very steady rental income to support its dividend (currently yielding 6.5%). Its leases are also insulating it from inflationary headwinds because tenants cover inflation-impacted costs (maintenance, real estate taxes, and building insurance), and most of its lease rates escalate at rates tied to inflation. With inflation still elevated, W.P. Carey's rental income is growing faster than normal. 

The REIT also has a solid investment-grade balance sheet. That's giving it the financial flexibility to continue making acquisitions. It expects to invest $1.8 billion to $2.3 billion to acquire additional income-producing real estate in 2023. 

These two growth drivers should enable W.P. Carey to continue increasing its attractive dividend. The company has given its investors a raise at least once per year since its public market listing in 1998.

Focus on the most sustainable incomes streams

SL Green's high-yielding dividend seems ripe for another reduction because of all the headwinds it's facing. However, that's not the case for the big-time payouts EPR Properties and W.P. Carey offer. Income-focused investors should avoid SL Green Realty's risky dividend and instead buy the safer payouts from EPR Properties and W.P. Carey, since they're more likely to rise than fall in the future.