Interested in income from stocks? You should be.
After all, dividends represent a big proportion -- about 40% historically -- of the S&P 500's total return. And more broadly, they're a great way to set up a recurring cash machine that writes you checks quarterly (and in some dividend stocks' case, even monthly) -- money that can supplement your day job and, later in life, Social Security income.
There are certain companies that have to pay out big dividends, and they're called real estate investment trusts, or REITs. These companies are required to pay 90% of their otherwise taxable income out as dividends, in return for which they don't pay income taxes, so it's a pretty sweet deal for both sides. I went looking for three high-yield dividend REITs that I think are worthy of investors' 2016 portfolios. Let's dive in to Realty Income Group (NYSE:O), Welltower (NYSE:HCN), and STAG Industrial (NYSE:STAG).
The still-growing behemoth
Realty Income Group, which styles itself "the monthly dividend company" because -- why else? -- it pays a monthly dividend, is the big dog in the retail real estate space (think standalone pharmacy buildings, restaurants, that sort of thing). Realty Income Group owns over 4,400 properties which it rents out on triple-net leases -- essentially leases where the tenant pays for all of the maintenance, utilities, taxes, insurance, and so on, all for the privilege of using the space. Growth has been consistent, with revenue up 9.8% year over year last quarter, while funds from operations (FFO -- a measure of earnings REITs use in addition to GAAP EPS) climbed by 14%.
And if you're looking for a safe and juicy dividend, you've come to the right place. Realty Income is part of the S&P High Yield Dividend Aristocrats Index because of its consistent dividend growth, with over 50 consecutive quarterly dividend increases on the books. Realty Income currently pays out a yield of about 4.6%. Dividend payments ate up about 89% of FFO over the trailing 12 months. That's a little closer to the 100% line -- which would indicate that the company is using all of the money it makes to pay its dividend -- than I usually like, but coupled with management's ambitious growth goals and consistent dividend increases, it's hard to argue with Realty Income's success.
The big-picture demographic opportunity
Welltower, formerly known as Health Care REIT, is also growing like a weed. Last quarter, revenue shot up by 15% and FFO grew by 9%. Couple that with a dividend yielding 5.4% that was recently increased -- and did I mention that it's paid 178 consecutive quarterly dividends? -- and it's reasonable to be excited about the stock.
But wait; there's more. I haven't told you how Welltower makes money yet.
Welltower primarily works in senior housing and post-acute care properties -- for example, places where skilled nursing is required. It's focused on caring for the elderly, which means that Welltower is set to benefit from the massive demographic tailwind that the aging of America represents. With the imminent retirement of the baby boomers, 10,000 of whom will be turning 65 every day from now through 2029, you can see what the demand for Welltower's properties may look like over the long haul. Growth, big dividend, demographic tailwinds. Check, check, check.
Scrappy and aggressive
STAG Industrial is a smaller-cap opportunity -- $1.4 billion market cap; Welltower's is $22 billion, while Realty Income's is $12.4 billion -- and it's riskier simply because it doesn't have the scale of Welltower or Realty Income.
Of course, investors are well compensated for that risk with growth opportunity -- and a big dividend. STAG yields just shy of 7%, and CEO Ben Butcher noted on last quarter's conference call that STAG's model will enable the company to achieve asset base growth of around "25% growth for 2015, for 2016, and probably for a number of years beyond that." (The quote comes from S&P Capital IQ.) Now, that's in part because STAG is buying up properties by issuing equity, so shareholder dilution is part of that asset growth.
STAG invests in industrial space, mostly warehouses, with a big focus on secondary and tertiary markets. The thesis is that there may be some mispricing because the big players haven't focused their dollars outside core markets. It's an interesting niche, and one where STAG is well positioned to continue its impressive growth. Willing to take on more risk for more potential reward? STAG looks pretty attractive to me.
A word of caution
REITs rely on the spread between their borrowing costs and their property income to generate FFO. If borrowing costs were to increase significantly -- like, say, if the Federal Reserve were to finally increase interest rates -- then the higher cost of capital would cause problems for everyone who has to borrow on an ongoing basis, most particularly REITs. Fortunately, all three sport good credit ratings, which should help keep borrowing costs low, and are making sufficient spreads on their investments that a slow rate increase, which seems the most likely at this point, won't do major damage to their businesses.
Bottom line: These three are fantastic stocks, and I think there's every reason to be excited about them for the long term.
Michael Douglass owns shares of Stag Industrial. The Motley Fool recommends Stag Industrial and Welltower. 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.