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3 High-Yield REITs to Buy in July


Jul 10, 2020 by Matthew DiLallo

This year has been a tough one for dividend investors, with many companies cutting or suspending yield payments due to the impact the COVID-19 outbreak had on their businesses. Commercial real estate hasn't been immune to this downturn, as many tenants haven't been able to pay their rent, which forced many real estate investment trusts (REITs) to slash their payouts to preserve cash.

However, some REITs have fared much better than others, which has allowed them to continue paying dividends. Three durable payouts that stand out this month are those of Equity Residential (NYSE: EQR), SL Green Realty (NYSE: SLG), and WP Carey (NYSE: WPC). In addition to their resiliency, they offer higher yields because of the hit to their stock prices amid this year's sell-off in REIT stocks.

A bankable dividend

Shares of Equity Residential have slumped about 25% this year, which has helped push the residential REIT's dividend yield up close to 4%. The main thing weighing on the stock is concerns that residential tenants won't be able to afford their rent if the economy goes into a prolonged economic tailspin.

However, that hasn't been the case for Equity Residential. The company collected about 97% of the residential rent it billed in April and May. Meanwhile, in early June, the REIT reported that initial leads, traffic, and applications had rebounded to about where they were in the same period of 2019.

Those factors bode well for the company's ability to maintain its dividend during these turbulent times. Add in its top-notch balance sheet, which includes one of the highest credit ratings in the REIT sector, and Equity Residential's high-yielding dividend is on rock-solid ground.

Lots of cushion to maintain the dividend

Shares of SL Green have tumbled more than 45% this year, which has pushed its dividend yield to 7.1%. The main factor weighing on the office REIT's stock is its high exposure to Manhattan, where it's the largest office landlord. With the COVID-19 outbreak devastating the region, there are concerns that people and companies might leave the city, impacting office occupancy and rental rates. However, given that the pandemic is now hitting other areas just as hard, a mass exodus seems less likely.

Meanwhile, most of the company's tenants are continuing to pay rent, with collections averaging 89.1% in April and 84.7% in May. While that will impact cash flow, SL Green typically pays out a conservative 50% of its funds from operations (FFO), giving it lots of cushion on the dividend. On top of that, it has a solid balance sheet with lots of liquidity after reaching its goal to boost its cash position up to $1 billion earlier this year. Those factors put its big-time payout on a firm foundation.

Diversification pays dividends

Shares of diversified REIT W.P. Carey have lost about 15% this year, helping push its yield up to 6.1%. That sell-off comes even though the company has had lots of success in collecting rent this year. As of early June, it had received 96% of April's rent and 95% of what it billed for May. That strong collection rate is a testament to its diversification as self-storage, office, and industrial tenants paid nearly all their rent, helping offset lower receipts from hard-hit industries like fitness, theater, and restaurants.

Complementing the company's solid collection rate is its conservative dividend payout ratio -- usually around 80% of FFO -- and investment-grade balance sheet. Meanwhile, the company recently took a step to bolster its finances by completing a stock offering that brought in some cash to pay down debt and finance future acquisitions. Given all these factors, W.P. Carey's high-yielding payout is on a very sustainable footing.

Well-supported yields

Investors have been selling off REIT stocks this year due to the sector's issues with collecting rent. While weaker collections have caused several REITs to slash or eliminate their dividends, not all payouts are in trouble. Because of that, yield-seeking investors can collect some attractive payouts.

Equity Residential, SL Green Realty, and W.P. Carey stand out for their compelling combination of high yields backed by rock-solid financials and healthy rental collection rates. That makes them great options for investors seeking an above-average real estate-backed income stream this month.

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Matthew DiLallo 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.

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