Real estate investment trusts (REITs) continue to attract investors looking for big dividends and income in today’s low interest rate environment.
Designed to allow regular retail investors the ability to invest in commercial properties, REITs are required to pay out the vast bulk of their cash flows as dividends. That payout requirement produces yields in the 4% to 7% range for the majority of the sector.
And unlike many high-yielding sectors, REITs actually perform quite well in rising rate environments after the initial “shock” of the rate hike. That makes them perfect additions for anyone’s portfolio these days.
But not all REITs own “boring” office buildings, shopping malls or apartments.
There are plenty of specialized and niche REITs cranking out dig dividends. For investors, looking past the sector’s normal property types can lead to some real income and total return opportunities. In fact, with the IRS continuing to give out a ton of private-letter rulings, there are now more specialized REITs than ever before.
Here are 3 niche REITs paying out big dividends.
REITs Paying Big Dividends: Digital Realty Trust (DLR)
Dividend Yield: 4.93%
The biggest trends in tech — whether we’re talking cloud computing, mobile commerce or big data — all require one thing: tons and tons of server computers. But owning specialized buildings and all that necessary hardware to keep them running is a very expensive proposition for many firms, especially smaller startups.
Enter data-center REITs like Digital Realty Trust (DLR).
DLR owns 131 different data center locations across the globe and rents space in those locations to other companies to house and hold their server computers. DLR’s client list actually pretty impressive, including the three largest stock and mercantile exchanges in the world.
That big client list and steady need for housing data and running servers has translated into steady growth in DLR’s bottom line. The firm continues to see growing revenues across its core business line. To earn extra cash, the REIT has been engaging in some unREIT-like, but complementary businesses like offering IT solutions to its customers. This foray into IT should help boost profits further down the line.
The cash flows from DLR’s operations continue to trickle their way back into investor’s pockets. Since Digital Realty went public in 2004, it has managed to grow its payout from 16 cents to today’s payout of 85 cents per share a quarter. That’s a 430% increase.
Today, DLR yields a healthy 4.93%.
REITs Paying Big Dividends: EPR Properties (EPR)
Dividend Yield: 6.4%
When it comes to REITs, EPR Properties (EPR) is a weird bird.
EPR’s main bailiwick is owning and operating entertainment complexes — movie theaters, restaurants, golf courses and even water/ski parks. With the depths of the recession finally behind us, many Americans have finally begun opening their wallets, and consumer spending metrics are rising.
The increase in spending should help EPR’s tenants drive sales and pay their rents on time.
The real problem with EPR’s portfolio is that the firm isn’t just “Entertainment Properties REIT” anymore. It now owns 71 properties in childhood education centers, charter schools and private schools. This segment has given the REIT trouble before and isn’t a big contributor to cash flows.
But investors shouldn’t worry. It’s the kind of self-contained operation that could be carved off if an activist investor got involved in EPR stock.
In the meantime, EPR has been paying down debt and has been steadily increasing its dividend since the Great Recession. Since 2010, EPR has posted annual dividend growth of 7%. The non-traditional REIT currently yields 6.4% from its unusual mix of properties.
However, for bold investors, EPR could be one of the best REITs to buy for income.
REITs Paying Big Dividends: Extra Space Storage (EXR)
Dividend Yield: 3.44%
Benefiting from America’s housing crisis — via the trend towards downsizing and growth in the number of renters — self-storage REITs have managed to post great returns.
EXR owns 1,150 self-storage properties across 35 states, Washington, D.C. and Puerto Rico. Those properties comprise approximately 750,000 units and nearly 80.0 million square feet of rentable space.
That sheer breadth of properties makes EXR the second-largest owner/operator of self-storage units in the United States. And we’re talking about an enormous, fragmented industry. Most self-storage units are owned by mom-and-pop operators.
And EXR continues to capitalize on just how fragmented the market is, by continually making smart deals. Its latest was a 1.4 billion acquisition of 169 properties from SmartStop Self Storage. That deal will help pad the company’s already robust cash flows.
On the dividend front, the REIT did have a set-back in 2009 and 2010. However, since that time, EXR has recovered its payout and is now paying significantly more than before the cut. That dividend is much safer now as funds from operations (FFO) cover the payout.
EXR currently yields 3.44%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.