You may want to put down the stocks and focus on real estate investment trusts. It turns out, REITs have been the way to go over the last decade or so.
According to J.P. Morgan Asset Management, REITs have been “the best-performing asset class in the market in the past 15 years” … by a wide margin.
A report by the investment manager showed that the firms that own apartment buildings, office plazas, shopping malls and other properties managed to gain an average of around 12% a year since 2000. Large-cap stocks — as measured by the S&P 500 Index — only managed to return around 4.1%.
Driving that performance has been the focus of REITs toward maximizing shareholder value through big-time dividends. In exchange for certain tax benefits, REITs are required to kick out the majority of their cash flow’s back to investors as cash payouts. That produces dividend yields in the 4% to 7% on average. The combination of high yields and investor demand for them has helped the asset class kill it over the long haul.
And there’s no reason to believe REITs won’t continue to put up that kind of great performance.
With that in mind, here are three REITs that have a great combination of high-yield and capital gains potential.
High-Yield REITs to Buy #1: Stag Industrial Inc. (STAG)
Dividend Yield: 6.1%
When it comes to high-yielding REITs, Stag Industrial Inc (STAG) could be a great choice. The firm has delivered pretty well on both the dividend and capital gains front since going public in 2011. The key has been in STAG’s underlying portfolio focus.
STAG owns and operates industrial warehouses. But not just any warehouses, but those smaller industrial properties that only house a single occupant. The benefit for the REIT is two-fold.
First, STAG is able to buy many of its properties on the cheap. Warehouses operated by blue-chip firms like United Parcel Service, Inc. (UPS) often go for premiums. Your local manufacturer … Not so much.
Second, because of the smaller, single tenant risk, STAG is able to charge slightly more for its rents. Someone like UPS has major pricing power. Again, your local mom-and-pop operator doesn’t get that luxury.
To counteract the risk, STAG owns hundreds of warehouses. 292 to be exact. A single tenant issue won’t hurt its bottom line.
Speaking of that bottom line, STAG’s portfolio focus has translated into some decent cash flows and continued dividend growth. Its latest quarter, saw funds-from-operation increase 11.4%. Those sorts of big increases to distributable cash flow have helped STAG deliver dividend growth of 34% in such a short amount of time.
High-Yield REITs to Buy #2: HCP, Inc. (HCP)
Dividend Yield: 6.6%
For HCP, Inc. (HCP), things haven’t been exactly going aces. The firm is one of the largest healthcare REITs around — focusing on skilled nursing, senior housing, hospitals and other medically-related real estate. The problem is, not all of these properties are really grooving.
The skilled nursing segment of its portfolio has suffered hard, as major tenants have faced lower rents/demand, credit downgrades and even a government investigation or two. While HCP isn’t directly on the “hook” for these firm’s problems, it does create some tenant/rent headaches for its property portfolio.
So what is HCP doing? It’s cutting the fat. The healthcare REIT is spinning off all its skilled-nursing assets into a new publicly traded REIT. The idea is that HCP will now be able to continue on its growth plans and focus on its core assets in senior housing, life science, medical office buildings. And after raising some money via the spinoff and related asset sales, HCP is planning on bolstering its balance sheet by reducing debt and increasing its cash balances.
That should help HCP keep its dividend going strong — something it’s done over the long haul. When it comes to REITS, HCP has the distinction of being the only real estate firm considered a dividend achiever and has paid a rising dividend for 31 years.
High-Yield REITs to Buy #3: Vereit Inc (VER)
Dividend Yield: 5.6%
Like previous pick HCP, some of the best bargains in REITs are those firms going throw some major growth pains. Case in point — Vereit Inc (VER).
Vereit’s story starts with real estate mogul Nicholas Schorsch and American Realty Capital Properties. After combining a few various non-traded REITs, American Realty became one of the largest single property REITs in the country — holding more than 4,600 different properties. And it came out that the firm lied about its accounting.
A management and name change, as well as restatement of earnings, brings us to VER stock.
The new management at the firm has worked to reduce and prune its portfolio of underperforming and “flat” leased properties. Debt reduction and bolstering its balance sheet have also been a priority.
The efforts seem to be working. Vereit has seen its debts decline and cash flows finally start moving in the right direction. FFO for the latest quarter managed to beat analyst’s estimates by a penny. What’s really great is that VER’s wins on the FFO front have helped it reinstate its dividend — which it cut because of the accounting scandal.
Meanwhile, investors are still evaluating the REITs potential in a negative light. Its current market capitalization of $8 billion is about half of what its property portfolio is worth. That’s a huge bargain for investors. Even more so considering that Vereit’s turnaround is beginning to take root.
As of this writing, Aaron Levitt was long STAG and VER.
