This article was updated on March 14, 2016.
Investments that pay high dividend yields are always in fashion, and smart investors have learned that real-estate investment trusts often carry impressive payouts. Because of tax laws that require REITs to distribute almost all of their income to shareholders, investors who own REIT shares can expect more income than they'd likely get from regular companies. Yet with all the complexities involved with REITs, you have to be careful in picking good prospects. Let's take a look at three top REITs with an eye toward getting you the dividend income you want.
Realty Income gives you monthly income
One of the biggest problems investors face is that although you typically need income every month, most stock pay dividend quarterly. Realty Income (NYSE:O) is an exception to that rule, and it used the feature as a marketing technique, actually trademarking the term "The Monthly Dividend Company" for itself. The REIT has paid 548 consecutive monthly dividends over a 45-year span, and it has increased its payout each quarter for 73 consecutive quarters going back to 1997. Realty Income yields about 4%, and it boasts about a 5% annual growth rate in its payout over the long run.
Realty Income's business model is quite simple: it takes the monthly income it generates from leasing its commercial properties and pays it out to its investors. With most of its exposure to the retail sector, Realty Income has properties in 49 states and has a well-diversified portfolio of tenants to reduce risk. It's hard to find a more impressive track record of success in the REIT business than Realty Income, and that should give investors some peace of mind in considering its shares.
Health Care REIT has exposure to a fast-growing sector
Some REITs focus on niche areas of the real-estate market, and that can produce great long-term success. Welltower (NYSE:HCN), formerly known as Health Care REIT, invests in healthcare-related properties like senior housing facilities, outpatient medical facilities, and long-term care properties. It's an international player, with small holdings in Canada and the U.K. to bolster its large U.S. portfolio. The REIT carries a yield of about 5%, and it began 2016 with a 4% increase to its quarterly payout, which is consistent with the boosts it has made on an annual basis for more than a decade.
Welltower stands out from many REITs because it has relatively little leverage, choosing to finance its investments with relatively little debt. That leaves it somewhat less exposed to changing interest rates than the typical REIT, which is an advantage in the current macroeconomic environment. Moreover, the positives of having exposure to the fast-growing healthcare arena are considerable, given the demographic shift of an aging population both in the U.S. and in the REIT's international markets. Welltower has the potential to keep providing stable growth for years to come.
Starwood Property Trust takes an unusual angle on a popular niche
Most REIT investors have heard a lot about mortgage REITs, which tend to invest in mortgage-backed securities using highly leveraged strategies that produce big yields but also bring substantial risks. Starwood Property Trust (NYSE:STWD) is a mortgage REIT with a different angle, though, making loans and owning securities that are backed not by residential mortgages but rather by commercial real-estate assets. By acting as a more flexible provider of capital to commercial real-estate companies, Starwood produces substantial income, and that has given investors an impressive 10% dividend yield.
Starwood has a heavy concentration in office buildings and hotels, but it has a widely diversified portfolio geographically and also owns positions in apartment buildings, retail property, and other types of commercial and residential real estate. By maintaining a low loan-to-value ratio, Starwood emphasizes safety, managing risk and reducing the potential losses from any loan that goes bad. With a conservative level of leverage, Starwood is a good way for risk-averse investors to consider stepping into the mortgage-REIT realm.
REITs are known for their high yields, but you still have to be discriminating to find the best investment options. These three REITs aren't the only good players in the industry, but they each have strong attributes that merit consideration for investors looking to maximize their dividend income safely.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.