Surging stock prices have driven down dividend yields this year. The S&P 500 currently yields around 1.3%, which is approaching its historical low. That's leaving income-focused investors with fewer attractive options these days.
However, one sector remains ripe with enticing income-generating opportunities: Real estate investment trusts (REITs). Higher interest rates have weighed on valuations across the space, keeping their yields high. Stag Industrial (STAG +0.75%), Realty Income (O +0.21%), and Mid-America Apartment Communities (MAA 0.80%) currently offer dividend yields that are more than double that of the S&P 500. That's one of several factors making these high-yielding REITs look like streaming buys this April.
Catalysts abound
NYSE: STAG
Key Data Points
Stag Industrial currently offers around a 4% dividend yield. That hefty payout is very sustainable. The industrial REIT signs long-term leases with clients (they have a weighted average lease term of 4.5 years) that contain clauses that escalate lease rates by an average of 2.7% per year. Those features provide it with stable and steadily rising cash flow. Meanwhile, it has a relatively conservative dividend payout ratio (75% of its cash is available for distribution). That enables it to retain about $90 million annually to fund new investments. Stag Industrial further fortifies its dividend with a strong balance sheet and a relatively low leverage ratio (5.0 to 5.5 times).
The company's rock-solid financial foundation gives it the flexibility to acquire more income-producing industrial properties. Stag Industrial expects to acquire $350 million to $650 million of properties this year. Those deals should further grow its cash flow.
Finally, the most notable catalyst is lease expirations. Due to the long-term nature of its leases, Stag Industrial isn't fully capturing the recent surge in industrial rents. The company expects to capitalize steadily on this trend as existing leases expire and reprice to much higher market rents (Stag sees cash rent on new and renewal leases surging 25% to 30% this year, which should drive 5% growth in same-store net operating income). Add accelerating rent growth and the upside from acquisitions to its higher dividend yield, and Stag could produce strong total returns from here.
A great value
NYSE: O
Key Data Points
Realty Income currently offers a dividend yield approaching 6%. That big-time payout is largely due to the effect higher interest rates have had on the REIT's stock price. Shares are currently more than 25% below their high in early 2022, even though it's a much stronger company.
The REIT recently closed its accretive acquisition of fellow REIT Spirit Realty. In addition, it has made an average of $9 billion in additional property acquisitions in each of the last two years. These deals have helped further diversify its portfolio and grow its rental income, enabling it to continue increasing its dividend.
Like Stag Industrial, Realty Income pays a very sustainable monthly dividend. It has a durable real estate portfolio secured by long-term leases. Meanwhile, it also has a low dividend payout ratio and a top-notch balance sheet. These factors give it the financial flexibility to continue acquiring income-producing real estate. Realty Income believes it can grow its adjusted funds from operations (FFO) by 4% to 5% per share each year over the longer term. Add that to its high yield, and the REIT should easily produce a more than 10% average annual total return from here.
Multiple value drivers
NYSE: MAA
Key Data Points
Mid-America Apartment Communities, or MAA, currently yields around 4.5%. A big driver of that high yield is the more than 40% slump in its stock price from its peak before rates started rising in 2022.
That headwind should fade as the Federal Reserve starts lowering interest rates in the coming years. On top of that, the apartment REIT should experience a resurgence in rent growth. While rents across its portfolio rose 7% last year, growth moderated in the back half of the year due to new apartment supply in its markets. "We expect that the volume of new apartment deliveries will start to decline in late 2024, setting the stage for improved rent growth," stated CEO Eric Bolton in the fourth-quarter earnings press release.
In addition to a reacceleration in rent growth, MAA expects to pursue new emerging growth opportunities. It already has five apartment communities under construction that should come online over the next two years. It sees the potential to begin four to six more projects over the next 18 to 24 months. It also recently purchased two newly built multifamily communities. Given its strong balance sheet, it has the flexibility to capitalize on additional development and acquisition opportunities as they emerge. Add these catalysts to higher rent growth and falling interest rates, and MAA could rebound sharply in the coming quarters.
Attractive yields with strong upside catalysts
Stag Industrial, Realty Income, and MAA pay high-yielding dividends, making them attractive options for those seeking income. They also have compelling upside catalysts on the horizon, which could enable these high-yielding REITs to produce strong total returns in the coming years. That makes them look like screaming buys this month.
