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Income investors are in a difficult position. In this investing climate, satisfactorily high dividend yields are difficult to find. The rise in the stock market since the Great Recession has pushed dividend yields down; the S&P 500 Index on average yields little more than 2% today. Moreover, the continuance of the Federal Reserve’s low interest rate monetary policy has kept fixed-income yields low as well.
As a result, income investors hungry for high yield need to turn to suitable alternatives. The good news is that there are plenty of high-yield stocks in the real estate investment trust asset class. These stocks are commonly referred to as REITs, and they have long been the favorites of income investors. In exchange for a favorable tax status, REITs are required to distribute at least 90% of their earnings to shareholders as dividends. This means the entire REIT asset class is filled with high-yield stocks.
REITs allow investors the opportunity to invest in real estate properties through the equity market while providing strong dividend yields in the 4% range, or even higher in some cases.
Below, Dividend.com highlights four REITs investors should consider now.
CubeSmart’s business model is the ownership, operation, acquisition and development of self-storage facilities. The company is growing at high rates thanks to rising demand for self-storage in the United States. CubeSmart grew funds from operation (FFO), a key metric for REITs that is a non-GAAP measure similar to earnings per share, by 15% last year. 2015 FFO came in at $1.25 per share; this growth resulted in strong share price performance over the past year. CubeSmart stock currently trades for 26 times FFO.
CubeSmart stock pays an annual dividend of 84 cents per share, which equates to a 2.6% dividend yield. The dividend represents a 67% FFO payout ratio. Going forward, the company has given guidance of $1.35-$1.40 per share of FFO in 2016. At the midpoint of the forecast, CubeSmart would grow FFO by 10% this year. Its continued growth of FFO and a modest payout ratio should allow the company to continue growing its dividend this year and beyond.
Equity One owns, acquires, and develops shopping centers and other retail locations in the United States. The REIT pays an annualized dividend of 88 cents per share, which comes out to a 3.1% dividend yield at its March 28 closing price.
Equity One had a strong 96% portfolio occupancy rate as of the end of the year, but the company did not grow FFO at high rates. FFO rose 13% in the fourth quarter, but only 2% for the full year. Some of this is due to the waning demand for physical shopping centers in the United States. Fortunately, the dividend should be secure. The company maintains a 72% payout ratio as a percentage of FFO, which is not an alarming level.
Equity One should be able to continue increasing its dividend, as growth is expected to pick up due to the benefit of property acquisition. Management expects 12% growth in FFO this year. The stock trades for 23 times FFO.
General Growth Properties invests in real estate markets primarily through owning, leasing, and developing mall properties in the United States. General Growth Properties’ dividend yield is 2.6%. The REIT raised its dividend twice last year. Further, the company grew FFO by 8% last year to $1.44 per diluted share. Its current payout ratio is 52%.
General Growth Properties was the only REIT in this group to decline over the past one year as investor sentiment continues to be bearish. There is a great deal of uncertainty over the growth outlook for shopping malls as a greater share of retail is conducted on the Internet. But investors should expect dividend growth to pick up in future years as its underlying business gains momentum. Company FFO for this year is expected to be $1.52-$1.56 per diluted share, which would represent approximately 7% growth at the midpoint. The stock is modestly valued. It trades for 20 times trailing FFO, which is a lower multiple than many others in the REIT asset class.
First Industrial Realty owns and manages real estate in the United States, particularly in the industrial sector of the economy. First Realty stock outperformed the market over the past year and offers a 3.3% dividend yield, which is the highest of this group. Its high yield is the result of a major 49% dividend increase for the first-quarter 2016 payout.
Such strong dividend growth is well ahead of most other REITs and is a reflection of First Industrial’s underlying business expansion. Full-year 2015 FFO was $1.27 per diluted share, compared with $1.16 per share the previous year, for a year-over-year growth rate of 9%. This was due to additional properties in the portfolio as well as 5% growth in rents. The company maintains an excellent portfolio with 96% utilization at the end of 2015. First Industrial carries a 59% trailing payout ratio in terms of FFO per share, and the stock trades for 17 times its 2015 FFO. Going forward, FFO is expected to grow to $1.41-$1.51 per share, which would represent 11%-18% year-over-year growth.
Income investors desiring yield in this environment must think outside the box. Traditional dividend stocks are one solution, but many have low yields due to the stock market increases in recent years. As a result, REITs like the four mentioned in this article have attractive dividend yields and secure payouts.
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Check out the securities going ex-dividend this week.