High-dividend stocks are quite popular in this low-yield environment, and REITs are a favorite among income investors because of their big yields.
For those unfamiliar with REIT investing, these high-dividend stocks are “real estate investment trusts.” As the name implies, REITs deal with real estate in some form — including trading mortgage paper, leasing commercial real estate, owning real estate investments and everything in between. And as a trust, REITs are structured in a way that mandates 90% of all taxable income be delivered back to shareholders.
This adds up to a formula that encourages high dividends for shareholders.
While REITs work this way in a broad sense, it’s important to know that they can vary widely based on their underlying businesses.
So which REIT investing strategies are working right now? Let’s start with these five high-dividend stocks as examples of which REITs are working best:
CYS Investments (CYS)
Dividend Yield: 13.9%
YTD Returns: 24%
CYS Investments (CYS) is a real estate investment trust that doesn’t actually own any physical real estate. Instead, CYS trades in mortgage-backed securities.
Yes, REIT investing in companies like CYS can expose you to the same derivatives that played a big role in the financial crisis … but don’t panic, because higher-quality loans and the benefit of a low interest rate environment have allowed so-called mREITs like CYS to make a lot of money trading mortgage paper as the housing market has recovered.
Of course, the big issue is that CYS is sensitive to interest rate risk should rates rise and eat into the spreads of its loan portfolio.
We saw that in 2013, as CYS stock fell about 22% on the year.
However, the stock was so oversold it briefly traded below its net asset value. And since then, investors in REITs like CYS have realized the selloff was a bit overdone. Shares are up 22% YTD, and the company has returned to profitability with earnings this year, looking to easily cover the 32 cents per share in dividends it is paying.
Furthermore, rates have actually fallen in 2014 — and despite alarmists predicting mREITs would implode as the Federal Reserve considers tightening rates in the next year or so, the sector has actually hung quite tough and continues to throw off huge yield.
CYS could have another strong year or two, with modestly low rates providing a tailwind, and with a juicy 14% yield and momentum behind shares, it’s hard to pooh-pooh it as a stock that has its best days long behind it.
Resource Capital (RSO)
Dividend Yield: 14.8%
YTD Returns: -8.7%
Resource Capital (RSO) is by far the riskiest player on this REIT investing list. Like all mREITs, RSO deals primarily in mortgage paper, which means it is sensitive to interest rate risk should rates rise and eat into the spreads of its loan portfolio.
RSO stock is down year-to-date in 2014 despite a 3% gain for the S&P 500 in the same period, and has seen earnings decline to significantly under current payout rates. So underperformance is a risk.
Another risk is a reduction in dividends because the company is paying out more than it takes in. Still, despite paying 80 cents annually in dividends despite projected earnings that are half that, this REIT hasn’t cut distributions yet and continues to yield a massive 14.7%. It’s also worth noting that the company is still profitable, even if earnings don’t cover distributions in full.
Investors willing to take on the risk of underperformance and a possible dividend cut could be well served by buying RSO on the dip and enjoying nearly 15% annual returns from the dividends alone.
Blackrock Kelso (BKCC)
Dividend Yield: 9.3%
YTD Returns: -3.2%
BlackRock Kelso Capital Corp. (BKCC) is a business development company, or BDC, which generates revenue from investments in and loans to midsized companies. As that capital generates returns, BlackRock Kelso shares generate big dividends.
Of course, that means BKCC lives and dies by its underlying investments. You can look into its full list of investments here for more detail.
Obviously, nothing is for certain, and an economic downturn would take a bite out of many underlying investments in the BlackRock Kelso portfolio. And it might be a double whammy, since dividends could suffer from underperformance in the underlying investments, too. For instance, distributions went from 43 cents per quarter at the end of 2008 to just 16 cents in 2009 thanks to the downturn.
But it swings both ways, and BlackRock Kelso really puts the pedal down in good economic times. The current yield of 9.3% is calculated from the last 21-cent payment — yet BKCC paid 32 cents a share as recently as 2010. If the economy turns a corner and more midsize companies look to expand, BlackRock Kelso will benefit handsomely.
Arlington Asset Investment (AI)
Dividend Yield: 13.1%
YTD Returns: 1.5%
One final mREIT to add to this list is Arlington Asset Investment Corp. (AI). The mortgage player has a tremendous yield of 13.1% and has managed to hang tough despite other trusts in the space that have rolled back in the last year or so.
What makes Arlington different? Well, the business is essentially the same as many other mREITs in that the stock trades mortgage-related assets. However, Arlington has been consistently profitable and throws off earnings that mostly cover its big dividend payouts.
Consider that AI stock has paid 87.5 cents per quarter in dividends since mid-2011, showing great consistency while other mREITs have cut their distributions in the face of waning profits.
Furthermore, consider that Arlington’s share price is equally stable. AI stock is actually up 11% since January 2011, compared with popular mREITs like Annaly Capital (NLY) that are off by as much as 35% in the same period.
This mix of high yield and great stability makes REIT investing in Arlington worth a look despite the obvious interest rate risk.
Senior Housing Properties (SNH)
Dividend Yield: 6.9%
YTD Returns: 1%
Senior Housing Properties Trust (SNH) owns about 370 properties nationwide that focuses on mainly on senior living, but also leases a bit of space to clinics and biotech labs. This focus on Baby Boomer healthcare is a great place to be in to capitalize from the demographic trend that is reshaping America.
Beyond big-picture demographics, a separate reason to like this senior housing REIT is the fundamentals. The company has rapidly expanded, with SNH revenue currently double 2010 levels. Profits have remained fairly subdued, however, and annual earnings continue to be outstripped by the current dividend payments of 39 cents per share.
But it’s worth noting that SNH has paid that 39 cent quarterly dividend since mid-2012 — and that’s after an increase from 38 cents per share previously — so investors can have reasonable confidence that this payout isn’t going anywhere.
The company is well capitalized; Senior Housing Properties offered another 12 million shares in 2012 to pay back debt that raised $261 million, and just won another $350 million in an unsecured loan just a few months ago. While share prices have been sleepy lately, the big dividend and long-term demographic trend of aging Boomers will keep SNH sitting pretty in the years ahead.