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3 Top REITs to Buy With Dividends Above 5%

Dec 23, 2020 by Reuben Gregg Brewer
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In a low-yield world, a 5% dividend yield is extremely enticing. But you have to tread carefully, lest you buy a company struggling to survive. That's not the case at these three real estate investment trusts (REITs), which are all doing pretty well despite the coronavirus-related headwinds landlords are facing today. Here's why you should take a look at W.P. Carey (NYSE: WPC), National Retail Properties (NYSE: NNN), and LTC Properties (NYSE: LTC).

1. Diversification to the extreme

W.P. Carey is likely the top pick here. For starters, its rent collection rate never dipped below 96% even during the worst of the coronavirus pandemic in early 2020. That figure was back up to 99% in November. In fact, as a show of strength, the REIT has announced a dividend increase each quarter this year.

There are two big reasons why W.P. Carey is sailing through this rough patch virtually unscathed. First, it's a net lease REIT. That means it owns single-tenant properties, and its tenants pay most of the operating costs of the assets they occupy under long-term leases. It's a fairly low-risk niche in the REIT space. W.P. Carey tends to originate its own leases, too, so it makes sure the properties it buys are vital to its lessees.

Second, W.P. Carey has long focused on diversification. Its portfolio is spread across the industrial (24% of rents), warehouse (23%), office (23%), retail (17%), and self-storage (5%) sectors, with a large "other" component rounding things out. Further, it generates roughly 37% of its rent roll from outside the United States.

Careful acquisitions in a low-risk sector with an added layer of safety from diversification -- no wonder W.P. Carey is performing so well in the face of the coronavirus. With a yield of around 6%, backed by more than two decades of annual dividend increases and a long history of operating excellence behind it, most investors will likely find this REIT attractive.

2. Getting back to normal

At the other end of the net lease spectrum is National Retail Properties. This landlord is hyperfocused on U.S. retail assets, owning a selective portfolio of more than 3,100 single-tenant properties.

The key word there is "selective." Like W.P. Carey, National Retail Properties pays a great deal of attention to the properties it buys to ensure they're highly productive locations. In a worst-case scenario, which the coronavirus looks to be, its assets are the most likely to remain viable. That's how the REIT has managed to increase its dividend annually for over 30 consecutive years, including a hike in July 2020.

That said, investors remain very worried about National Retail Properties' retail focus. That's not unreasonable, given rent collection in April was around 50%. That number, however, was back up to 94% by October, proving its selective approach to acquisitions has indeed paid off. Despite the obvious improvement in its operating performance, this industry bellwether remains out of favor -- which is the opportunity here for more aggressive investors.

Historically, National Retail Properties' dividend yield has matched that of fellow bellwether Realty Income (NYSE: O). Right now, though, National Retail Properties' yield is roughly 5.3%, while Realty Income's yield is about 4.7%, a gap likely to close as investors get more confident that National Retail Properties is still as well-run as it's always been. Risk-averse investors should probably stick to W.P. Carey, but if you can stomach some uncertainty, National Retail Properties and its generous dividend might be of interest.

3. Think really long term

The last name up is LTC Properties, a landlord that owns nursing homes and assisted living facilities. The REIT doesn't operate the assets it owns, preferring to lease them out to others under long-term contracts. The problem today is that operating senior housing is a very difficult proposition during a global pandemic. Indeed, older people are more at risk from the coronavirus, and it tends to spread most easily in group settings. Move-outs (an industry code word that includes resident deaths) have increased, move-ins are down, and costs have risen. Times are indeed tough.

But those are issues LTC's tenants have to deal with, not LTC. It collected 94% of its rents in the third quarter. While it is working with tenants, some of which are having a hard time, its business is still on a pretty strong footing. In fact, its normalized funds available for distribution payout ratio was roughly 80% in the third quarter. That leaves some room for further adversity before LTC's dividend is at risk of being cut. Add to this that roughly 40% of its rents are backed by customers on the government's Medicare and Medicaid programs, and the foundation looks even stronger.

At the end of the day, the future is still going to include a lot more demand for the types of properties LTC owns. It projects more than double-digit growth in the 80-plus population over the next decade. In the meantime, investors can collect a fat 6% yield while the REIT muddles through the current headwinds that have investors perhaps a little too worried right now.

The bottom line: Know what you own

Although highly diversified W.P. Carey is probably a good high-yield option for just about any type of investor, the stories behind National Retail Properties and LTC Properties are a bit more nuanced. Both require an understanding of the impact the coronavirus is having and a belief that the future won't be so very different from the past.

Assuming the vaccines in the pipeline pan out as expected, a normalizing world will likely mean National Retail Properties and LTC Properties continue to reward investors with big dividends -- just like you'd expect from W.P. Carey, which has excelled operationally through this rough patch.

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Reuben Gregg Brewer owns shares of W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.