Dividend investors are always on the hunt for the best combination of yield and company quality. Right now, you can get above-average yields from industry-leading companies in the real estate investment trust (REIT) sector. Giant high-yield landlords Realty Income (O 1.63%) and Simon Property Group (SPG 1.29%) are two companies that you might want to buy today.
Why buy real estate investment trusts?
Real estate investment trusts were specifically designed to generate tax-advantaged income for investors. Property owning REITs like Realty Income and Simon are fairly simple businesses to understand, since they do exactly what you would do if you owned a rental property. The difference is that they do it at a much larger scale, which is the whole point. REITs allow small investors access to institutional-level properties.
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The tax-advantaged part of the equation comes about because REITs avoid paying corporate-level taxes if they distribute at least 90% of taxable earnings out as dividends. Uncle Sam isn't just giving away free money, though; shareholders have to treat the dividend income as they would regular earned income. But there's a workaround. If you buy a REIT in a Roth IRA, which is funded with after-tax money, you won't have to pay taxes on the REIT dividends you collect.
For investors who are retired, buying REITs in a Roth is a great way to boost income while still minimizing the taxes you have to pay. There are a lot of REIT options, but most investors will be better off sticking with the biggest and best companies, like Realty Income and Simon Property Group.
Realty Income is the net lease giant
The average REIT is currently yielding around 4.1%, which is more than twice the yield on offer from the S&P 500 index (^GSPC 0.70%). Realty Income's dividend yield is even higher at roughly 5.7%. This isn't some fly-by-night operation, either. Realty Income is the largest net lease REIT, with a portfolio of over 15,600 properties.
Although it is heavily focused on single-tenant retail properties, it also invests in industrial assets and is increasingly diversifying into other areas. For example, it has invested in casinos in recent years and has a partnership working to build data centers. Loans are a new platform, and Realty Income is also attempting to set up an asset management business to service institutional investors (which will generate fees to support shareholders' dividends). On top of all of this, the REIT is geographically diversified across the United States and Europe.
Realty Income won't wow you with growth; it is simply too large for that. But if you want to own the biggest and best competitors, this is going to be the high-yield net lease landlord for you.
Simon Property Group is the mall king
Simon Property Group's dividend yield is around 4.9% today, also well above the REIT average and the yield on offer from the S&P 500 index. The company's focus is on owning malls, which are retail properties but have a very different dynamic from the types of properties Realty Income owns. A mall is like an ecosystem, with each tenant impacting the way the ecosystem operates.
As the largest mall REIT, Simon Property Group owns a massive collection of traditional enclosed malls and outlet centers. Its portfolio spans the globe, though its foreign investments are largely outlet centers. Over the years, the REIT has increasingly focused its portfolio on the best malls, known as A malls. These tend to be modern, well-located properties that are capable of charging the highest rents because they draw the largest crowds. Simon is a very important partner to retailers.
SPG Dividend Per Share (Annual) data by YCharts
There is a caveat with Simon. It passes a huge amount of income on to investors, but during some recent economic recessions, it has cut its dividend. After the cut, however, the dividend has quickly started to grow again toward the precut level. In the case of the deep Great Recession, meanwhile, the dividend has now grown well beyond the precut level. Simon is a stock that you'll want to hold for the long term, perhaps even buying more shares when other investors are selling.
Realty Income and Simon are the kinds of giants you own forever
Like any business, Realty Income and Simon Property Group will see their fortunes wax and wane over time. But their size and long histories of success make them strong, high-yield landlords to look at today. While they are attractive REIT investment choices most of the time, their higher-than-average yields could make each a nice addition to your stock portfolio right now.
