With the Federal Reserve expected to cut interest rates for the first time in over four years this September, investors accustomed to earning 5% or more risk-free on their cash may need to look elsewhere for yield.
A likely destination for some of these inflows are real estate investment trusts (REITs), an asset class that has been battered by COVID-19, rising interest rates and commercial real estate weaknesses that have also impacted the regional banking sector.
“REITs are companies that own, operate or finance income-generating real estate properties,” says Rohan Reddy, director of research at Global X ETFs, which operates the Global X SuperDividend REIT ETF (ticker: SRET). “They are required to distribute at least 90% of their taxable income to shareholders, which makes them a popular choice for investors seeking regular income.”
[Sign up for stock news with our Invested newsletter.]
REITs are therefore known for paying higher-than-average distributions, which aren’t technically eligible cash dividends but periodic payments that can consist of ordinary income from the REIT’s operating profits, return of capital and capital gains.
“Overall, REITs are currently paying a yield that is nearly three times the dividend on the S&P 500 — plus the potential for capital appreciation,” says Abby McCarthy, senior vice president of investment affairs at Nareit.
That being said, the high yields from REITs are generally less tax efficient, which makes them better suited for tax-sheltered accounts like a Roth IRA. It’s also important to understand that a high yield on a REIT is not a free lunch. Sometimes, it can be a sign of trouble.
“Investors need to be very careful with high-yield REITs,” says Sam Adams, CEO and co-founder of Vert Asset Management. “Some could be considered high yield simply because their stock price has fallen so much that the dividend yield looks high.” Yields are calculated with the stock price as the denominator — so as the price decreases, the yield increases.
Therefore, before investing, it’s crucial to ensure that the REIT isn’t distressed. A good way to check this is by reviewing the REIT’s payout ratio, which should be based on cash flow rather than earnings. This is important because REIT earnings can be significantly affected by depreciation — a non-cash accounting charge that reduces the value of the assets over time.
When it comes to REITs, depreciation is a way of accounting for the wear and tear on buildings. For REITs, even though these buildings may still generate consistent rental income, the depreciation reduces the reported earnings, making them appear lower than the actual cash flow.
But because depreciation doesn’t impact the cash the REIT has on hand, calculating the payout ratio based on cash flow gives a more accurate picture of the REIT’s ability to sustain its high yields.
Here are eight high-yield REITs to buy today:
| REIT | Forward dividend yield |
| Realty Income Corp. (O) | 5.2% |
| AGNC Investment Corp. (AGNC) | 14.2% |
| Easterly Government Properties Inc. (DEA) | 7.8% |
| Omega Healthcare Investors Inc. (OHI) | 7.1% |
| Medical Properties Trust Inc. (MPW) | 6.9%* |
| Sabra Health Care REIT Inc. (SBRA) | 7.5% |
| Apple Hospitality REIT Inc. (APLE) | 6.7% |
| EPR Properties (EPR) | 7.5% |
*Reflects dividend cut announced on Aug. 8, and is based on Aug. 19 closing price.
Realty Income Corp. (O)
An easy rule of thumb for finding quality high-yield REITs is to isolate the select few with a long track record of increasing dividends. When it comes to this, none come close to Realty Income, an S&P 500 Dividend Aristocrat with over 25 years of consecutive dividend growth. It is also one of the few U.S.-listed companies that pays dividends monthly instead of quarterly. Currently, Realty Income yields 5.2%.
The company’s steadily growing distributable cash flows come from a portfolio of primarily non-cyclical retail clients, which includes grocery, convenience, dollar and drug stores. Overall, Realty Income has over 1,550 clients serving 90 industries across 15,450 properties. The company is managed conservatively, with an A- credit rating from S&P and a low debt-to-equity ratio.
AGNC Investment Corp. (AGNC)
“Given the leveraged business models of real estate, REITs may be poised to benefit from eventual rate cuts from the Federal Reserve,” Reddy says. “The lower borrowing costs that accompany falling interest rates and easing inflation pressures both serve as strong catalysts for real estate returns.” A special type of high-yield REIT that could benefit from an upcoming interest rate cut is the mortgage REIT.
AGNC Investment Corp. is a mortgage REIT that invests in residential mortgage-backed securities (MBS) guaranteed by U.S. government agencies like Fannie Mae, Freddie Mac or Ginnie Mae. Falling interest rates could therefore benefit mortgage REITs like AGNC because, all else being equal, they reduce borrowing costs and increase the price of the MBS it holds. The REIT currently pays a high 14.2% yield.
Easterly Government Properties Inc. (DEA)
“Investors may be able to achieve the best of both worlds by selectively prioritizing defensive segments of the real estate market, which are both resistant to a slowing economic environment while still maintaining exposure to the potential tailwinds that often come with falling rates,” Reddy notes. For this role, consider investing in a high-yield REIT that primarily leases to durable, essential tenants.
A great example is Easterly Government Properties, which as its name suggests primarily leases to U.S. government agencies via the General Services Administration. The 93 properties under management currently house tenants such as the FBI and the DEA. Easterly Government Properties currently pays a 7.8% yield.
Omega Healthcare Investors Inc. (OHI)
“Omega Healthcare Investors’ long-term, triple-net lease structures have helped shield it from some of the negative forces impacting the real estate sector,” Reddy says. “Built-in annual rent escalators on its agreements have helped its leases keep pace with inflation.” This means that the tenants are responsible for paying property taxes, insurance and maintenance costs, and its revenues stay ahead of inflation.
“In addition, Omega Healthcare Investors’ core exposure to long-term care and skilled nursing facilities gives it a defensive tilt in a slowing economic environment, which combined with its interest rate sensitivity as a health care REIT makes it well-positioned for anticipated rate cuts by the U.S. Federal Reserve,” Reddy says. Investors who buy this REIT can currently expect a 7.1% yield.
Medical Properties Trust Inc. (MPW)
“Long-term-care facilities comprise a historically stable sector of the real estate market, which has held up well in the backdrop of market volatility,” Reddy says. “This can be attributed to increased investor interest in alternative asset classes and strong secular tailwinds from an aging population.” For risk-inclined, bargain-hunting investors, a REIT to watch here is Medical Properties Trust.
For its second-quarter fiscal results, Medical Properties Trust raised a significant amount of capital to improve its balance sheet by divesting numerous properties. However, it did also cut its quarterly dividend again from $0.15 per share to $0.08 to offset the bankruptcy of its top tenant, Steward Health Care. At its Aug. 19 closing price of $4.64 per share, the new payout would represent a 6.9% yield.
Sabra Health Care REIT Inc. (SBRA)
“Sabra Health Care REIT saw its performance bounce back in the second quarter as investors flocked to health care REITs in anticipation of interest rate cuts and potential economic weakness.” Reddy explains. The REIT exceeded analysts’ expectations with net income of $0.01 and funds from operation (FFO) of $0.35, and also raised its guidance for the remainder of the 2024 fiscal year.
For net income, Sabra management raised 2024’s full-year guidance from $0.48 per share to $0.51, while FFO was raised from $1.33 per share to $1.36 per share. This is a positive sign for shareholders because an increase in FFO guidance indicates stronger operational performance and higher potential distributions to shareholders. Sabra Health Care REIT currently pays a 7.5% yield.
Apple Hospitality REIT Inc. (APLE)
If you’re optimistic that the Federal Reserve will be able to engineer a “soft landing” for the economy and avoid a recession, then a high-yield REIT operating in a more discretionary, cyclical sector could be a good bet. A great example is Apple Hospitality REIT, which leases to hotel tenants such as Marriott International Inc. (MAR), Hilton Worldwide Holdings Inc. (HLT) and Hyatt Hotels Corp. (H).
Similar to Realty Income, Apple Hospitality REIT is another rare company that pays monthly instead of quarterly dividends. By owning this REIT, you can earn consistent rental income from a portfolio of over 100 Marriott-branded hotels, 119 Hilton-branded hotels and five Hyatt-branded hotels spanning 30,000 guest rooms. Right now, Apple Hospitality REIT pays a 6.7% yield.
EPR Properties (EPR)
A potential boost in discretionary spending can also benefit “experiential” REITs such as EPR Properties, which primarily operates in the entertainment industry. This REIT operates a portfolio of 354 movie theaters, golf courses, ski resorts, water parks, amusement parks, casinos and fitness centers, and also owns some educational properties such as private schools and day care centers.
During its second-quarter earnings call, EPR Properties disclosed that it had a stronger balance sheet with excellent liquidity, and also reaffirmed its full-year 2024 guidance. A monthly cash dividend of $0.855 per share, or $3.42 annualized, was also declared, making a 3.6% increase over 2023’s annualized dividend payout. Currently, investors can expect a 7.5% yield.
More from U.S. News
Best Places to Invest in Real Estate in 2024
5 Top Income Investments for the Second Half of 2024
15 Best Dividend Stocks to Buy Now
8 Best High-Yield REITs to Buy originally appeared on usnews.com
Update 08/20/24: This story was published at an earlier date and has been updated with new information.
