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3 Top REITs with Dividends Above 5%


May 22, 2020 by Kevin Vandenboss

The stock market is still a bit shaken up from the pandemic since nobody knows for sure what things will look like on the other side of this. It's likely that certain REITs will have trouble keeping their heads above water when it's over, but it's looking like it will create some great opportunities for REIT investors with others.

These appear to be the best REIT investment opportunities right now when it comes to choosing an equity REIT with dividends above 5%.

Company (stock symbol) Property Type Dividend Yield
Innovative Industrial Properties (NYSE: IIPR) Industrial/cannabis 5.7%
STAG Industrial Inc. (NYSE: STAG) Industrial/warehouse 6.2%
STORE Capital (NYSE: STOR) Single-tenant net lease 7.8%

Innovative Industrial Properties

Innovative Industrial Properties invests in industrial facilities leased to state-licensed operators of regulated medical-use cannabis facilities. While there may be some additional risks involved with this type of REIT, the medical cannabis industry is expected to more than double in the next five years.

Innovative Industrial also has a strategy of targeting users that are already operational in their location with their sale-leaseback program. This gives the operator capital while Innovative Industrial gets a tenant with proven success in their location.

They're also one of the new kids on the block, having been founded in 2016. Their growth and outlook has remained positive, and they have beat their earnings estimates three out of the last four quarters.

This REIT carries very little debt, with a debt-to-EBITDA ratio of just under 3. This ratio is likely to remain low since there is a high demand for the specialized industrial properties needed for the cannabis industry, resulting in higher than average market rents.

The obvious risk with Innovation Industrial Properties is that the federal government has not legalized medical or recreational marijuana. Neither presidential candidate has hinted toward any plans of addressing this in the near future, so it's unlikely we'll see legalization across the board anytime soon.

Even with the inherent risks of this industry, investors have maintained their confidence in this REIT. Their share price had an impressive recovery shortly after the market fell and has remained fairly steady since.

Innovative Industrial Properties currently has the most conservative dividend on the list, but that's one reason they are likely to increase their FFO significantly over the next few years, assuming the industry's growth meets expectations.

STAG Industrial

STAG Industrial invests in single-tenant industrial properties throughout the United States. The bulk of their portfolio consists of distribution warehouses with high-credit national tenants.

STAG's distribution warehouse tenants are less affected by the current economic crisis, especially due to even more online purchases being made than ever before, as well as stores trying to keep up with the demand from some consumers overbuying.

STAG Industrial reported that less than 5% of their tenants asked for any type of financial relief in the wake of the COVID-19 pandemic. This is an impressive number compared to office, retail, and multifamily tenants.

Overall, industrial real estate has had a positive outlook since 2013 as vacancy rates have steadily decreased. While this trend is expected to slow down in 2020 as supply catches up with demand, rents are expected to increase by 5%.

STAG has a slightly lower dividend yield than the median yield across the sector, but it's expected to maintain stability with its conservative payout ratio and continue to grow its portfolio.

STORE Capital Corporation

STORE's portfolio is made up of single-tenant net-leased real estate with mostly service industry and retail tenants. While retail might sound like a scary word right now, STORE targets retail stores that aren't as vulnerable to e-commerce competition.

While STORE Capital may be taking a beating right now since it's likely that many of their tenants aren't paying rent, STORE's conservative payout ratio of 70 has given them the liquidity to weather this storm.

STORE is also less vulnerable than any one tenant going bankrupt since no single tenant accounts for more than 2.7% of their base rent. They have beaten their earnings estimates three out of the last four quarters and have consistently been predictable in their growth.

Since the market took a hit at the start of the pandemic, investors' confidence in STORE Capital Corporation has remained steady. It's unlikely they will have a lot of growth in the short term as they recover from the current market conditions, but in the medium to long term, they should be a great REIT to have in a portfolio.

Why these REITs are attractive now

All three of these REITs show the signs of being able to continue to grow after the pandemic as well as offer a healthy dividend income for the long term. While the real estate market is uncertain, these REITs have portfolios of income properties that are expected to continue thriving and have a low enough debt-to-equity ratio to protect them if real estate values fall for any length of time.

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Kevin Vandenboss has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Innovative Industrial Properties, Stag Industrial, and STORE Capital. The Motley Fool has a disclosure policy.

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