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3 Top Real Estate Stocks to Buy With Dividends Above 5%


[Updated: Jan 15, 2021] Jan 15, 2021 by Reuben Gregg Brewer
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Investors looking for income in today's low-yield world will salivate at the 5% plus yields being offered by this trio of real estate investment trusts (REITs). Better yet, all three of these landlords are leaders in their respective industry niches. If you can stomach some near-term uncertainty and think long-term, here's why you might want to own high-yielding W.P. Carey (NYSE: WPC), Federal Realty Investment Trust (NYSE: FRT), and Simon Property Group (NYSE: SPG).

1. A little bit of everything

"Everything" is a touch of hyperbole, but not by much when you are talking about W.P. Carey. Its portfolio is spread across the industrial (24% of rents), warehouse (23%), office (23%), retail (17%), and self storage (5%) property sectors, with a fairly broad "other" category rounding things out to 100%. Roughly 37% of its rent roll comes from non-U.S. properties (largely Europe). That's an incredible amount of diversification, making W.P. Carey an almost one-stop shop for investors looking to add REITs exposure to their portfolios. And it offers a juicy 6.2% yield.

However, that's not the best part of the story. This net-lease REIT, which means it owns single tenant properties for which its tenants are responsible for most property operating costs, has increased its dividend annually for 23 consecutive years. This includes four increases in 2020, despite the coronavirus pandemic. The most impressive thing about this record, however, is that it amounts to an increase in every single year since W.P. Carey went public in 1998. Of this trio, this is probably the best all around option and is appropriate for most investors, even those on the conservative side of the ledger.

2. In the right places

The next name up is Federal Realty, which owns a portfolio of around 100 retail centers and mixed-use properties, most anchored by necessity businesses like grocery stores. It's yield is right at the 5% mark, which is toward the high-end of this REIT's recent yield range. That's not shocking given the impact that the coronavirus has had on the retail sector. In fact, even though Federal Realty's rent collection rates have rebounded from their early pandemic lows, they were still only about 85% in the third quarter of 2020. Worse, management warned during Federal Realty's third quarter 2020 earnings conference call that its occupancy rates will likely fall into the mid to high 80% range in the first quarter, as it works to bring better tenants into its properties.

Getting new retailers into its properties and troubled ones out will take time, but don't get too caught up in the near-term issues, especially for a REIT that has an over five-decade-long streak of annual dividend increases (including one in 2020). This management team thinks long term and owns well-located and desirable properties in dense and wealthy areas. These are the types of properties that retailers want to be in. As proof of that, leasing rates were pretty normal in the third quarter, and Federal Realty is seeing interest from companies with nearby locations run by other landlords. Effectively, retailers want to move to Federal Realty's properties, even if it costs more in rent, to upgrade their real estate. Times are tough right now, but this sounds like the kind of REIT that a long-term investor would want to own.

3. Taking advantage of adversity

The last name is probably the riskiest: Simon Property Group. This REIT owns around 200 enclosed malls and outlet centers. It was particularly hard hit by the economic shutdowns related to the coronavirus pandemic and the pain isn't over yet. It only collected around 85% of the rent it was owed in the third quarter. Like Federal Realty, Simon needs to rework its tenant roster. Only it has bigger headwinds to deal with since most of its lessees aren't necessity-oriented businesses. In fact, unlike the two names above, Simon cut its dividend in 2020 because of the difficulties it's facing. But even after the dividend cut, it still yields a generous 6%.

It will take a strong stomach to step in here, but Simon does have some positive attributes. Notably, its portfolio is focused on some of the highest quality and ideally located malls. And while many of its peers are struggling to deal with debt-heavy balance sheets, Simon is relatively well positioned financially. In fact, it has been opportunistically using this downturn to buy assets, including a mall peer with high quality assets and, with partners, bankrupt retailers. All in, Simon looks like it will be a mall survivor and, perhaps, it may even come out the other side of this downturn a stronger competitor than when it entered. If that sounds attractive, then the hefty yield here might be for you.

Time for some deep dives

While highly diversified W.P. Carey and its 6.2% yield is probably a good fit for most investors, the same can't be said of retail-focused Federal Realty or Simon Property Group. However, both Federal Realty and Simon have well-positioned portfolios and are managing through the pandemic in decent fashion relative to peers. They are solid high-yield options for long-term investors who can handle a bit of near-term uncertainty.

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Reuben Gregg Brewer owns shares of Federal Realty Inv. Trust, Simon Property Group, and W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.