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3 Top REITs to Buy With Dividends Above 5%


Dec 10, 2020 by Matt Frankel, CFP
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The real estate sector hasn't exactly been a great performer in 2020. While the S&P 500 is higher by 14% so far this year, the Vanguard Real Estate Index Fund (NYSE: VNQ) is still down by almost 8%. In other words, real estate is underperforming the overall stock market by 22 percentage points -- that's a pretty big difference.

However, this could actually be a positive thing for long-term investors for two reasons. First, it has created the opportunity to buy some excellent real estate investment trusts, or REITs, at significant discounts from their pre-pandemic stock prices. And second, since price and dividend yield have an inverse relationship, the underperformance of the real estate sector has led to higher dividend yields in many excellent REITs. These three in particular have dividend yields above 5% and could be worth a closer look right now.

Medical offices are a rock-solid type of commercial property

Some types of healthcare REITs have suffered during the COVID-19 pandemic. Nursing homes and senior housing facilities, for example, are seeing dramatically lower move-in rates as compared to 2019. But medical offices have held up just fine, which is why 5.2% yielding medical office REIT Physicians Realty Trust (NYSE: DOC) is a high-paying stock to consider right now.

Physicians Realty Trust owns a portfolio of 269 medical office properties, most of which are leased to major health systems. Medical offices are one of the most resilient types of real estate investors can own. Healthcare services are something people need no matter what the economy is doing. Medical offices not only remained open for the most part during the pandemic, but many even got a tailwind as hospitals suspended nonessential procedures.

The proof is in the numbers. Physicians Realty Trust collected more than 99% of its billed rent in the second and third quarters, and the company reported leasing volumes had returned to pre-pandemic levels during the third quarter.

The only mall REIT worth buying

Some investors are afraid to put their money into anything having to do with malls, and with a couple of recent high-profile mall REIT bankruptcies, who could blame them? But Simon Property Group (NYSE: SPG) isn't just any mall REIT. This large REIT, the largest mall operator in the world, reduced its dividend to increase financial flexibility during the pandemic and still yields about 5.8%.

For one thing, Simon's malls are the best-in-breed, hands down. On a recent list of the 10 most valuable malls in the United States, seven are Simon properties. Simon has worked hard to adapt its properties to changing consumer tastes and has done an excellent job of incorporating nonretail elements like entertainment venues, hotels, and even office spaces to keep traffic high.

Second, Simon has the financial flexibility to pursue opportunities to grow its portfolio or redevelop its properties as it sees fit. The company has $9.7 billion in liquidity, and recently agreed to acquire a major rival -- Taubman Centers (NYSE: TCO) -- at a discounted price.

Is this yield too good to be true?

Last but not least, if you're looking for income and growth and have a fairly long time horizon, Iron Mountain (NYSE: IRM) could be worth a closer look right now. At the current share price, Iron Mountain's $2.47 annual dividend represents an 8.3% annual yield.

First, the bad: Iron Mountain's core business is records storage -- think of it as self-storage facilities for businesses. And this business is likely to decline over time. Many businesses still need to keep physical records, but records storage will gradually shift to a digital format.

The good news is that Iron Mountain recognizes this and has been quietly building a data center portfolio. For the time being, the core records management business still makes up more than 60% of total revenue, and the question is whether Iron Mountain's data center business will grow fast and profitably enough going forward.

Based on third-quarter normalized funds from operation (FFO), Iron Mountain's dividend represents a 101% payout ratio, which is admittedly a cause for concern. However, the company's steady and predictable records storage revenue combined with its data center growth could help boost profitability going forward. And if the company can successfully pivot, the current share price could end up being very cheap.

Buy for the long term

Like any REIT investment, these three only make sense if you're planning to hold your shares for at least five years, preferably even longer. There is simply too much that can affect these stocks in the short run, and that's especially true as the COVID-19 pandemic and its economic effects remain a very fluid situation. In other words, while I'm confident these three REITs will handsomely reward investors over the long run, I have absolutely no idea where their share prices will be next month, or even next year. Invest accordingly.

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Matthew Frankel, CFP owns shares of Iron Mountain and Simon Property Group. The Motley Fool owns shares of and recommends Physicians Realty Trust and Vanguard REIT ETF. The Motley Fool has a disclosure policy.