The average real estate investment trust (REIT), using Vanguard Real Estate Index ETF (VNQ +0.22%) as a proxy, is yielding roughly 4.1%. That's much higher than the market, with the S&P 500 index's yield at a measly 1.3%. But you can still do better than 4.1% without too much trouble, and you don't have to take on huge risks. Here are three high-yield REITs you'll want to get to know in July.
1. Realty Income is the net lease giant
All three companies on this list are net lease REITs, which means that they buy single-tenant properties and have leases that require tenants to pay most property-level operating costs. While any single property is high risk because there's only one tenant, across a large enough portfolio the lease structure ensures that risk is very low. When it comes to net lease REITs, Realty Income (O +0.87%) is the 800-pound gorilla, and by a wide margin (its market cap is well more than three times the size of its next closest peer).
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Realty Income's dividend yield is a lofty 6% as July gets under way. That's near the highest levels of the past decade, suggesting the stock is on sale. Higher interest rates are a headwind, as they raise costs. But Realty Income remains the gold standard in the net lease niche. It has an investment-grade-rated balance sheet. It has increased its monthly-pay dividend for three decades. It owns a reasonably diversified mix of retail and industrial assets. And the REIT has exposure to both the U.S. and European property markets.
While Realty Income's size comes with advantages, such as the ability to easily do deals that would stretch the finances of smaller peers (including acting as an industry consolidator), there is a negative. Realty Income is likely to grow rather slowly over time. The yield will be a material part of your return. But you probably won't mind if you are a dividend investor looking to build a substantial passive income stream.
NYSE: O
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2. NNN REIT is even more reliable than Realty Income
Realty Income's three-decade-long streak of dividend increases is impressive, but it is outdistanced by NNN REIT's (NNN +0.14%) 34-year streak. Sure, that's only four more years, but it speaks to the consistency of NNN REIT's highly focused business model. While Realty Income has diversified its massive portfolio, partly out of necessity, NNN REIT is focused on only the U.S. single-net lease retail property type. It owns around 3,500 buildings (Realty Income, for reference, owns over 15,400) and works very closely with its tenants.
That second bit is the key thing to understand about NNN REIT. Since 2007, 72% of the company's property purchases have been sourced through existing relationships. In other words, it is growing along with its customers because it is a reliable financial partner when tenants are looking to sell properties to raise cash for growth. That often leads to NNN REIT getting the best locations, something that is highlighted by the fact that the REIT's occupancy levels only dipped to 96% during the worst of the Great Recession.
In other words, when investors were worried that financial markets would crumble, NNN REIT was a rock in a storm. If dividend consistency is your target, consider digging into this REIT and its generous 5.3% yield today.
NYSE: NNN
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3. Agree Realty is focused on growth
In some ways, Agree Realty (ADC +0.26%) is the least impressive REIT on this list, noting that its dividend has only been heading higher for about a decade. And in other ways, it is a standout performer, given that annualized dividend growth over the past 10 years has averaged around 6% a year. By comparison, Realty Income and NNN REIT only increased their dividends at an annualized rate of 3% or so over that same span. Investors have noticed and placed a premium price on Agree's stock, putting the yield at roughly 4.85% (which is still comfortably above the REIT average).
NYSE: ADC
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Like NNN REIT, Agree is focused on U.S. retail assets. The REIT's future growth probably won't measure up to its past, given the scale it has gained over the past decade. But with around 2,100 properties it continues to have plenty of runway for growth. As such, for investors that are looking for a mix of income and growth, Agree might be the best option of this trio. Like Realty Income, Agree is investment-grade-rated and pays its dividend at a monthly cadence.
Property markets will adjust to Interest rate changes
The big negative for all three of these high-yield REITs is interest rates, as noted above. Interest rates rise and fall all the time, and property markets eventually adjust. Right now, high rates haven't been fully reflected in property prices, leading to a bit of a dislocation on Wall Street when it comes to pricing some of the best-run companies in the REIT sector. Realty Income, NNN REIT, and Agree Realty all fall into that category, and they are still on sale as July gets under way.
