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3 Top REITs with Dividends Above 5%


Jun 12, 2020 by Matthew DiLallo

Shares of most real estate investment trusts (REITs) have lost value this year due to the impact the COVID-19 outbreak is having on rental collections. Market conditions have gotten so challenging that several REITs had to reduce or suspend their dividends.

However, many others have maintained their payouts. Because of that, they offer investors an even more attractive income stream these days because dividend yields move in the opposite direction as stock prices. Three top options that stand out are Medical Properties Trust (NYSE: MPW), SL Green Realty (NYSE: SLG), and WP Carey (NYSE: WPC) as they all currently yield more than 5%.

A healthy income stream

Shares of healthcare REIT Medical Properties Trust are down about 3% on the year, which has helped push its dividend yield to 5.3%. That payout is on a firm foundation. One factor supporting this view is the strength of its rental collections, as the hospital owner has received 96% of the rent it billed in April and May. Because of that, the company remains confident that it can achieve its funds from operations (FFO) guidance range of $1.65 to $1.68 per share, implying a conservative payout ratio of 65%.

Medical Properties Trust further supports its payout with a strong balance sheet, including a conservative leverage ratio of 5.5 times debt-to-EBITDA. That healthy credit profile provides the company with ample financial flexibility to continue acquiring hospitals. It already bought $2 billion of healthcare properties earlier this year and has a long list of acquisition opportunities. As it expands its portfolio of hospital real estate, those new additions will grow Medical Properties' FFO. That would give it more room to boost the dividend, which it has increased for the past seven years.

Strength amid the storm

SL Green Realty is Manhattan's biggest landlord. Because of that, its tenants have experienced the full brunt of the COVID-19 outbreak. However, most of them have continued to pay rent. Overall, SL Green collected 89.1% of the rent billed in April and 85.7% of May's rent, with office tenants paying more than 90% while retailers are closer to 60%.

Because of that, SL Green believes it will produce between $6.60 to $7.10 per share of FFO this year. That forecast implies a roughly 52% FFO payout percentage based on its current dividend, which has seen the yield rise to 5.8% following a more than 30% decline in its stock price this year. In addition to that conservative dividend payout ratio, SL Green recently completed its plan to raise $1 billion in cash via asset sales. That strategic cash position gives it the flexibility not only to continue supporting the dividend but also to repurchase shares and potentially make value-based acquisitions.

A solid portfolio backing a big-time yield

Shares of diversified REIT WP Carey slid more than 10% this year, pushing its yield to around 6%. That payout is on solid ground thanks to the strength of the company's portfolio and financial profile.

Overall, WP Carey collected 95% of the rent due in April. One reason that number was so high is that WP Carey doesn't have much exposure to retail (17% of its annual base rent) or other hard-hit tenants like fitness, movie theaters, and restaurants (2% of annual base rent). While WP Carey did pull its 2020 guidance, its strong rental collections in April suggest it might still deliver results close to its initial FFO guidance range of $4.86 to $5.01 per share.

That would imply a payout ratio of around 84%. While that's higher than the other REITs on this list, it's comfortably below the 100% danger line. Meanwhile, WP Carey has a strong investment-grade balance sheet backed by a low leverage ratio to provide further support for its payout.

Big-time income streams from real estate

The stock prices of Medical Properties Trust, SL Green, and WP Carey have all lost ground this year because of the impact the COVID-19 outbreak has had on the REIT sector. One positive outcome is that the sell-off has pushed their yields higher, with each one currently above 5%. Those dividends have proven durable, thanks to the strength of their rental collections and financial profiles, which bodes well for the long-term sustainability of these high-yielding payouts.

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Matthew DiLallo owns shares of Medical Properties Trust and 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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