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3 Top REITs to Buy with Dividends Above 5%


Jul 14, 2020 by Matthew DiLallo

Dividend yields move in the opposite direction to share prices. Because of that, when stocks fall, income investors can pick up even higher dividend yields, providing the companies can maintain their payouts. That's certainly the case in the real estate investment trust (REIT) sector this year as shares have fallen nearly across the board due to the impact COVID-19 has had on rent collections.

While several REITs have reduced or suspended their dividends, many others have the financial strength to maintain their payouts during this downturn. Because of that, lots offer higher yields, given the overall pressure on REIT stock prices. Three that currently stand out as top buys for yield-seeking investors are Empire State Realty Trust (NYSE: ESRT), Physicians Realty Trust (NYSE: DOC), and W.P. Carey (NYSE: WPC).

This iconic dividend payer seems safe

Empire State Realty Trust owns one of the world's most iconic office buildings. Its namesake property -- the Empire State Building -- is the centerpiece of its portfolio and Manhattan's skyline. In addition to that iconic building, the REIT owns 13 other office properties around the New York City area, which also lease space to retail tenants.

This prime portfolio helps support the company's dividend, which currently yields a well-above-average 6.6%. One reason the REIT's yield is so high is that its stock has tumbled more than 50% this year because the company has experienced some impact from the COVID-19 outbreak. It had to close the revenue-generating observatory at the Empire State Building to help slow the spread of COVID-19. Meanwhile, some tenants didn't pay rent in May and April due to the shutdown of New York City, notably its retailer tenants. Because of that, there's some concern that Empire Realty Trust might need to cut its dividend.

However, those concerns seem overblown for many reasons. First, the REIT typically pays out less than 50% of its funds from operations (FFO) to support its dividend, giving lots of breathing room. It has also been working with tenants on equitable solutions so that it eventually receives the back rent. Finally, it has an excellent balance sheet, including one of the lowest leverage ratios among NYC-focused office REITs and more than $1 billion in cash. Because of these factors, Empire State Realty's dividend should continue standing tall despite the impact of COVID-19.

Immune to COVID-19

Shares of healthcare REIT Physicians Realty Trust have slumped more than 10% this year, pushing its dividend yield to 5.5%. Weighing on the stock is the impact COVID-19 has had on healthcare providers' ability to perform elective procedures. That's affecting their income, which is making it harder for some to afford their rent.

However, most are still fulfilling their lease obligations. Physicians Realty Trust recently reported that it collected 98% of April's billings, 97% of what tenants owed it in May, and 96% of June's rent. Add that healthy collection rate to the REIT's solid investment-grade balance sheet -- which it backs with a low leverage ratio -- and its high-yielding dividend seems immune to the effect of COVID-19.

Rents continue rolling in

Diversified REIT W.P. Carey currently yields 6.3%. That well-above-average yield is due in part to a more than 15% slide in its stock price this year. One factor weighing on the REIT is that some of its tenants -- movie theaters, fitness centers, and restaurants -- are struggling to pay their rent. However, thanks to its overall tenant diversity, it has collected 96% of April's rent and 95% of May's billings.

Meanwhile, W.P. Carey complements its strong rental collection rate with an investment-grade balance sheet backed by low leverage metrics. It recently boosted its financial position by completing a stock offering. Because of these factors, its high-yielding payout is on solid ground.

These high-yielding REITs look attractive

While this year has been a tough one for REIT investors, it has also provided them with some opportunities. One of them is the ability to lock in higher dividend yields now that stock prices have fallen. Several REITs currently yield more than 5%, with Physicians Realty, Empire State Realty, and W.P. Carey standing out these days as among the more attractive buys for yield-seeking investors.

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Matthew DiLallo owns shares of W. P. Carey. The Motley Fool owns shares of and recommends Empire State Realty Trust and Physicians Realty Trust. The Motley Fool has a disclosure policy.

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