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

Oct 14, 2020 by Reuben Gregg Brewer

It's not that easy to find a generous 5% dividend yield in today's low-rate world. But if you take your time and look past the obvious negatives, there's a lot of opportunity out there for income investors in the real estate investment trust (REIT) space. You'll just need to keep your risk tolerances in mind as you peruse this trio, which ranges from a sleep-well-at-night choice to one that could keep even a deep sleeper up into the wee hours of the morning. But if you're looking for 5% or higher yields, you should start with W.P. Carey (NYSE: WPC), Federal Realty Investment Trust (NYSE: FRT), and Simon Property Group (NYSE: SPG).

1. Sleepy night night

W.P. Carey is one of the most diversified real estate investment trusts (REITs) you can buy. It spreads its portfolio across industrial (24% of rents), office (23%), warehouse (22%), retail (17%), self storage (5%), and other (the rest). In addition, the REIT gets about 37% of its rents from outside the United States, providing material geographic diversification as well.

W.P. Carey currently offers investors a 6.1% yield backed by 23 years' worth of consecutive annual dividend increases. It has increased its dividend each quarter in 2020 despite the global pandemic. The increases are modest, but they speak volumes about the strength of W.P. Carey at a time when dozens of other REITs have cut their dividends.

Notably, W.P. Carey's rent collection rate never fell below 95% even during the worst of the COVID-19-related economic shutdowns. And today the REIT is collecting 99% of what it's due. If you're looking for a generous yield that you don't have to worry too much about, W.P. Carey is a name that should be on your short list today.

2. Location, location, location

The next REIT up is Federal Realty Investment trust. It's a bit more risky than W.P. Carey even though its 5.4% yield is lower. The key reason for that is that Federal Realty is focused on owning retail properties. So far in 2020 its rent collection has been a bit tough to look at, hitting a low of around 50% in the early days of the COVID-19 crisis. Even at the end of the third quarter, when 94% of its tenants (based on square footage) were reopened, the REIT was still only collecting around 83% of the rent it was owed.

But don't get too downbeat here. Federal Realty owns a portfolio of about 100 open-air strip mall and mixed-use assets. Most are anchored by grocery stores and other businesses that people go to on a regular basis. More importantly, these properties are focused in areas with high barriers to entry and sizable, wealthy populations nearby. In other words, they are highly desirable assets to own, and when the world figures out how to deal with COVID-19, tenants and customers will want to be in them. In fact, the REIT was able to sign 50 new leases in the second quarter -- a sign of just how desirable the assets it owns are.

Meanwhile, the REIT announced a dividend increase in August. That adds another year to the over half a century worth of annual dividend hikes that Federal Realty already has under its belt. Yes, times are tough today, but management made clear during Federal Realty's second-quarter 2020 earnings conference call that it is confident it will come out the other side of this downturn an even stronger company.

3. Some riskier fare

The last name up here, Simon Property Group, is only appropriate for aggressive investors. This REIT is the largest publicly traded mall owner in the country, owning roughly 200 enclosed malls and outlet centers. Although Simon hasn't reported its rental collection rates, they are likely to be as bad as Federal Realty's, if not worse. In fact, it has resorted to taking some of its tenants to court to collect what it is owed. Which helps explain why the REIT's yield is 7.6%. However, unlike Federal Realty, Simon actually cut its dividend in the face of the current headwinds. The stock is down a painful 55% or so in 2020.

The big issue is that major anchor tenants are going bankrupt and stores that generally fill malls, notably clothing purveyors, are facing the greatest headwinds right now. There's a huge upheaval in the mall sector, and Simon has its work cut out for it as it works to adjust to the current shopping environment. Indeed, it was already dealing with the retail apocalypse when 2020 began, and things have only gotten worse. So why be so positive?

The company's collection of malls are generally well located and highly desirable. While weaker malls are unlikely to survive the current troubles, Simon's portfolio should, overall, come out just fine. And, as less-desirable malls close, there's going to be a reverse networking effect, which should make Simon's malls even more desirable to lessees and consumers left with fewer shopping options. Retenanting the malls Simon owns will be a multiyear effort, but in the end, the mall giant is probably going to come out of this rough patch an even more powerful competitor.

Something for everyone

These three REITs are in very different positions today and are likely to appeal to very different investors. Diversified W.P. Carey is probably the best all-around pick, offering a sizable yield backed by a relatively conservative business. Federal Realty requires a bit more risk tolerance because of its retail focus, but the incredible dividend streak it has amassed speaks to a REIT that puts investors first. When the negative view of retail landlords turns for the better, its shares will likely recover pretty quickly. Simon is a high-risk/high-reward play, if you're willing to bet that malls aren't dead and that this REIT has what it takes to survive and thrive -- you'll just need to be prepared for a multiyear turnaround effort.

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