The big selling point for buying shares of Annaly Capital (NLY +1.51%) is the mortgage real estate investment trust's (mREIT) outsized 13.9% dividend yield. Don't buy into that; history suggests that rate isn't sustainable.
Investors interested in good yields on REITs will be better off with Federal Realty (FRT +1.66%), Realty Income (O +1.01%), or Essex Property Trust (ESS 0.46%), all of which have increased their dividends annually for decades. Here's why these three unstoppable stocks are better buys.
Annaly Capital: One chart to dissuade them all
Pardon the punny Lord of the Rings reference above, but it really does describe the situation. You only need one chart to see why most investors will be better off avoiding Annaly Capital and its giant dividend yield. The chart below shows that despite the yield being fairly lofty on an ongoing basis (the orange line), the dividend and stock price (purple and blue) have both been heading lower since around 2010. That's a terrible chart for any investor trying to find a reliable dividend-paying stock.
Now add in the complexity of the mortgage REIT business, which can be impacted by interest rates, housing market dynamics, mortgage payment trends, and refinancing activity, among other things. There are just too many checks in the negative column for most average investors here. But there are plenty of other REITs you can buy with incredible dividend track records.
NYSE: FRT
Key Data Points
1. Federal Realty is a Dividend King
Although Federal Realty's dividend yield is a fairly modest 4.3%, it stands head and shoulders above all other public REITs because it is the only Dividend King in the group. It has achieved this dividend success by focusing on a small, high-quality portfolio of strip malls and mixed-use assets. The story is location, location, location, as it operates in areas with average wealth and population size metrics that are higher than any of its strip mall peers. If dividend consistency is important to you, Federal Realty needs to be on your watch list if not in your portfolio.
NYSE: O
Key Data Points
2. Realty Income calls itself "The Monthly Dividend Company"
Realty Income pays dividends monthly and has increased its dividend annually for nearly three decades. The dividend yield is currently around 5.8%. The core of the REIT's portfolio is single-tenant net lease retail properties, though it also has some modest exposure to industrial assets and "other" (the other grouping includes vineyards and casinos). Net leases require the tenant to pay for most property-level operating costs. Although a property with just one tenant is high risk, across a large enough portfolio, the risk is fairly low -- Realty Income owns over 15,000 properties and is one of the largest net lease REITs you can buy. The REIT is so focused on returning dividends to investors that it trademarked the nickname "The Monthly Dividend Company." It's a sleep-well-at-night REIT.
NYSE: ESS
Key Data Points
3. Essex has some risks but also a strong track record
Essex owns apartment buildings on the West Coast. That's a concentration risk, geographically speaking, as it ties the landlord's fortunes to technology-dependent regions. And yet, the dividend has been increased annually for nearly 30 years. Clearly, the bet on the West Coast has worked out well so far. The core of the business suggests that won't change, given that Essex is highly focused on owning modern, amenity-rich apartments. These tend to be in high demand regardless of what's going on in any given sector. Not every year is a good one, and 2024 is expected to see just flat financial performance, thanks to higher interest rates, among other things. But the 3.9% dividend yield here is actually near the highest levels of the past decade, suggesting the stock is historically cheap right now.
Big yields don't always lead to big returns
As you can see with Annaly over the past decade or so, a huge yield can lead dividend investors down a bad investment path. You'd be better off focusing on REITs that have proven they can perform well in good markets and bad, with that evidence coming from a steadily growing dividend. When you look for REITs like that, you'll find Federal Realty, Realty Income, and Essex Property Trust all stand tall.
