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Real Estate Investment Trusts, or REITs, are a favorite of investors looking for dividend income from their investments. REITs pay out dividends on the income generated from their real estate portfolio, so they're a great option for investing in the real estate market.
There are several metrics to look at when choosing which REITs to purchase. A great piece of investment advice: While a high- dividend yield is attractive on its own, there should be a balance between REIT dividends, growth, and stability.
A few important things to look at right now when choosing REITs:
- Leverage: It's healthy for a REIT to have some level of debt, but too much leverage will make the REIT more vulnerable to vacancy and a downturn in the real estate market.
- Growth: The top REITs are successful at increasing their Funds From Operations (FFO) by increasing rents and growing their portfolio. Since a REITs dividend yield is based on its stock price, steady growth is good for the dividend income.
- Payout Ratio: While a higher payout ratio means more dividends today, a more conservative ratio will give the REIT more liquidity to fund acquisitions and sustain itself in difficult times.
The top REITs to buy now for dividend income
A high dividend yield is great, but a high dividend yield that's sustainable is even better. And if the company also has lots of room to grow, that's the trifecta.
One sector where you're likely to find stocks that check all three boxes is real estate, and specifically in REITs.
At a time when the average real estate investment trust (REIT) yields roughly 3.6% and the S&P 500 Index less than half that level, it can be hard to find worthwhile high-yield REITs. But it can be done if you take your time and focus on companies with solid businesses. Three REITs that even conservative dividend investors will likely find attractive right now are W.P. Carey (NYSE: WPC), Broadmark Realty Capital (NYSE: BRMK), and LTC Properties (NYSE: LTC) -- and each one has a yield above 5%!
1. Diversified net lease
W.P. Carey is one of the oldest names in the net lease niche of the REIT sector. Net lease REITs own single-tenant properties, but their lessees pay for most of the operating costs of the properties they occupy. It's generally considered a low-risk way to invest in real estate. W.P. Carey yields 5.9% and has increased its dividend annually every year since its IPO in 1998.
One of the core investment approaches here is diversification, with the REIT generating 25% of rents from industrial assets, 23% from office, 22% from warehouse, 18% from retail, and 5% from self-storage (the rest is "other"). In addition, roughly 39% of its rent roll is located outside of the United States. W.P. Carey likes to invest opportunistically, so this diversification allows it to put money to work in just about any environment by shifting toward the areas with the most attractive returns.
The dividend history here, which includes a hike in each quarter of 2020, is a clear example of W.P. Carey's strength. However, it's also worth noting that the REIT's rent collection rate never dipped below 96% last year despite the pandemic. That's an incredible show of strength in the face of adversity.
2. A different kind of mREIT
The next name here is Broadmark Realty Capital, which is technically a mortgage REIT. Unlike most mREITs, however, it makes loans directly to construction companies. This is what's called a hard money loan. Generally speaking, these loans carry generous yields and are relatively short in duration (they get repaid when the project is completed). Moreover, Broadmark typically only finances around 60% of what it believes the final project is worth, providing an ample cushion in case something goes wrong.
The company went public via a blank-check company in late 2019, just before the coronavirus pandemic upended economic activity. That caused Broadmark to reduce its dividend because COVID-19 resulted in delays at construction projects. However, business is getting back to normal, and the REIT increased its dividend by 17% in January. The yield is a hefty 8% or so today.
Adding to the allure here, Broadmark makes sparing use of debt. It ended 2020 with zero debt on its balance sheet and only just inked a $135 million revolving credit facility. This new facility will most likely be used to bridge the gap between funding new deals and raising cash via stock sales. The goal is to grow the portfolio over time, and the credit facility will reduce the idle cash the company holds at any given moment. That's a good thing and will hopefully lead to a well-supported, expanding dividend. At the end of the day, this is a mortgage REIT even conservative investors could love.
3. Not as risky as it sounds
The last name here is LTC Properties, which owns nursing homes and assisted-living facilities. Given that the coronavirus pandemic has been a particular headwind for senior housing, some investors might balk at the inclusion of this REIT. But, like W.P. Carey, LTC uses a net lease approach, so it actually managed through 2020 in relative stride, collecting virtually all of the rent it was due. To be fair, it's working with some of its tenants, providing rent concessions, but on the whole, it's business as usual for the REIT.
In fact, with vaccinations picking up, the senior housing industry is likely to see an uptick in demand. That's partly because the world is starting to get a handle on COVID-19 (leading customers to come off the sidelines) but mostly because the demographic trends haven't changed. Baby boomers are still cresting into retirement and will need additional help. LTC's properties provide that help.
But what's most notable here is that the REIT had funds from operations per share (FFO) of $2.41 in 2020, with dividends paid of $2.28 per share. So, even in a terrible year for senior housing REITs, it managed to handily cover its dividend. LTC offers a roughly 5.2% yield, and demand for the property types it owns is expected to grow for years to come.
A doable number
A 5% yield sounds high in today's investment environment, and it actually is. However, that doesn't mean you can't find good REITs with 5% or higher yields, it just means you need to be picky. W.P. Carey, Broadmark, and LTC Properties are all high-yielders worth a deep dive today. Basically, they have unique approaches in their sectors that separate them from their peers, which make them solid options for even conservative investors.
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