Higher interest rates have crushed high-yielding dividend stocks. With lower-risk income investments such as bonds and bank CDs now offering higher yields, the values of dividend stocks have fallen. That has pushed up their yields to compensate investors for their higher risk profiles.
There is a silver lining to the sell-off in high-yield dividend stocks. Many offer very enticing yields these days. Simon Property Group (SPG -0.26%), Vici Properties (VICI -0.28%), and Easterly Government Properties (DEA -0.26%) stand out to a few Fool.com contributors for their attractive dividends. Here's why they think investors should buy them hand over fist right now.
Rumors of its death are greatly exaggerated
Jason Hall (Simon Property Group): While rising rates and e-commerce are challenges that Simon Property Group must navigate, the reality of their impact is probably overstated. That's certainly true for e-commerce. In the first half of the year, earnings and funds from operations (FFO) -- a more useful measure of profits for REITs than earnings -- held steady, while its occupancy rate increased to almost 95%. Base rent increased 3%, while retailer sales per square foot were $747. Brands and retailers continue to value and expand their use of Simon's class A properties. As a result of stellar yet still-improving operating results at its properties, Simon raised its full-year FFO outlook.
What about debt? you may ask. Legitimate question, and probably the biggest headwind Simon faces. Over each of the next four years, it will have between $3.9 billion and $4.9 billion in debt maturing, the majority of which it will refinance, and most of it has an average weighted interest rate or around 3.5%. That's going to increase. But with investment-grade credit, Simon should continue to get favorable terms, similar to the $1.3 billion in notes it issued in March, yielding 5.5% and 5.85% and due in 2033 and 2053 respectively. So costs are going up, but not in an onerous way.
Which brings us to the opportunity: At recent prices, Simon's dividend yield is 7.2%, the highest it's been outside of temporary market crashes since the early 2000s, when interest rates were actually higher than they are now:
SPG Dividend Yield data by YCharts
This is an excellent time to buy this premium business while it's on the discount rack.
A low-risk wager with a potentially big payoff
Matt DiLallo (Vici Properties): Vici Properties owns a premier real estate portfolio. The specialty REIT owns some of the most iconic properties along the Las Vegas Strip, including the Venetian, Caesars Palace, and MGM Grand. It owns several other casino properties across the U.S. and Canada and has a growing non-gaming experiential real estate investment portfolio.
It leases these properties back to the operators under long-term net leases that provide it with stable rental income. It targets to pay out 75% of its cash flow to investors via dividends. That gives it some cushion while allowing it to retain cash to make new investments.
Vici Properties' dividend currently yields 6%. That high yield is due to the 20% slide in its stock price from its 52-week high and the REIT's recent 6.4% dividend increase. It has increased its dividend in all six years since its formation.
The REIT's shares have slumped even though it's growing briskly. Its revenue jumped 20.3% to $904.3 million in the third quarter, while its adjusted FFO surged 16.4% to $547.6 million and increased 10.7% on a per-share basis. The company has closed several acquisitions over the past year, including buying its first four gaming properties in Canada.
There's more growth ahead. Vici Properties recently agreed to acquire 38 bowling entertainment centers in a sale-leaseback transaction with Bowlero for $431 million. The deal has embedded growth potential, as Vici has the right of first offer for future sale-leasebacks with Bowlero for the next eight years. The company has several other strategic partnerships that should provide it with new investment opportunities in the future.
That growth should enable Vici Properties to continue increasing its dividend. With its share price down and yield up, it's too good of an opportunity for income-focused investors to pass up right now.
A reliable tenant, stable cash, and a reasonable payout
Tyler Crowe (Easterly Government Properties): One thing I think some investors aren't fully appreciating is the attractiveness of other income-generating assets on the market today. The risk of loss on a 5% yield on a stock are much higher than the risk on a 5% yielding government bond. So if I'm going to take on that additional risk, I want to be adequately compensated with a higher yield. Easterly Government Properties looks like a REIT that can deliver.
As of this writing, the stock has a dividend yield of 10.4% and is down considerably in recent months. That decline has happened in part because the company hasn't been able to deliver much dividend growth in recent years. Its business, leasing buildings to various U.S. government agencies such as the FBI, isn't exactly a high-growth business. Over the past five years, its payout growth has been less than 1% annually.
There's a price for everything, though, and a 10% yield from a business with a high-quality tenant and sufficient cash to cover its payout and pay down some debt appears to be a reasonable trade-off in today's market.
I don't expect Easterly Government Properties to be a high-growth company. That's not the point of owning the stock. What it is, though, is a higher-yielding investment with the financials to support it. For those looking solely for income, Easterly Government Properties looks like it is sufficiently compensating you for the additional risk of owning stock.
