Real Estate Investment Trusts, or REITs, are known for their dividends. The average dividend yield for equity REITs is right around 4.3%. However, there are some high-dividend REITs out there that pay significantly more than average.
The dividend yield on a REIT is based on its current stock price. That means that even if a REIT pays a really high dividend, it won't be a good return on your investment if the price drops significantly.
It's important to look at more than a REIT's yield when investing for dividend income. You'll want to look at metrics that will give you more insight into how healthy a REIT is and how likely it is to provide you with a nice annual dividend each year.
You want to make sure the dividend yield isn't too good to be true when investing in a high-dividend REIT. There are a few red flags to look for that may point to some trouble on the horizon.
- Over-leveraged. A REIT may be paying high dividends because they're using too much leverage to acquire their properties. They are quite vulnerable to any dips in the real estate market or spikes in vacancy if their real estate investment portfolio is overleveraged.
- High payout ratio. REITs are able to pay high dividends because they're required to pay 90% of their taxable income to shareholders. However, that taxable income doesn't include tax deductions like depreciation. That gives them some room to keep cash on hand. A high-dividend REIT might be paying so well because they have a high payout ratio. The problem with this is that they aren't left with much liquid capital to handle unexpected rough patches. A REIT with a more conservative payout ratio is likely to have more cash on hand to acquire more real estate and have a safety net if the real estate market takes a hit.
- Declining revenue. This is a major red flag for any type of investment. A bad quarter can be easily overlooked. A steady decline in earnings is usually something to stay away from. They may be invested in struggling areas or property types that are losing demand, which would hurt their rental income. They may also be selling properties to pay off debt, which would also result in less rental income.
Taking everything into consideration, here are three high-dividend REITs that look like a great opportunity to buy now.
Omega Healthcare Investors, Inc. (NYSE: OHI)
Omega Healthcare Investors holds investments in healthcare facilities such as assisted living, skilled nursing, and rehab hospitals.
While the COVID-19 pandemic has been hard on long-term care facilities in general, the operator's that lease Omega Healthcare Investors' properties rely on government funding, which is why they were able to collect 98% of their rent in April.
This REIT did take on some additional debt but overall looks promising moving forward since they appear to be weathering the storm well and the demand for this type of real estate isn't going anywhere.
Plymouth Industrial REIT, Inc. (NYSE: PLYM)
Plymouth Industrial REIT invests in industrial real estate such as distribution centers, warehouses, and light industrial. The REIT focuses on Class B properties in secondary markets in the Midwest.
Plymouth has an exceptionally high dividend yield of 12.68%, but that comes at a price of some higher risk than the other REITs on this list. This REIT has a high amount of leverage, with a debt-to-EBITDA ratio of 11.09. This would normally be a huge red flag, but it's due to their aggressive acquisition strategy.
Their debt is all at a fixed interest rate, and it's well staggered. They also don't have any major debt maturing through 2021, which means their high leverage shouldn't knock their feet out from under them during this economic downturn.
This REIT could be a great buy right now while it's still recovering from this hit last quarter.
Innovative Industrial Properties, Inc. (NYSE: IIPR)
Innovative Industrial Properties invests in industrial properties that are leased to state-licensed operators with state-regulated medical cannabis facilities.
This REIT has a much more conservative dividend yield than the other REITs on this list, at 5.4%. However, the cannabis industry is projected to grow significantly over the next few years, so this young REIT is expected to grow with it.
Many investors are still leery of anything tied to cannabis, but as regulations become more favorable, and the REIT continues to prove itself, many more investors are likely to start getting on board. Innovative has been recovering well from the pandemic, so now seems to be the best time to take advantage of this opportunity.
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Are these high-dividend REITs right for your portfolio?
REITs are great for investors who like dividend stocks, and high-dividend REITs are even more attractive with their recurring payouts. However, the high dividend yields come with a higher level of risk. If your portfolio has room for some aggressive investments, then these REITs are ones you'll want to take a serious look at.
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