Real estate investment trusts (REITs) really took a beating in the second half of last year. From the late summer peak through the post-election trough, the Vanguard REIT ETF (NYSEARCA:VNQ) shed 17% of its value … at a time when the broader market has been flying high.
It seems that if you live by the yield, you die by the yield, and the selloff in bonds in recent months hit REITs particularly hard. Amid the global hunt for income, high-yield REITs had come to be viewed as bond substitutes. So the post-Trump bond dump meant a post-Trump REIT dump.
The thing is, we’ve been here before.
REITs shed around 20% of their value in the 2013 “taper tantrum” and again in late 2015 leading up to the Federal Reserve’s first interest-rate hike in nearly a decade. And in both cases, REIT investors that had the levelheadedness to recognize a market overreaction when they saw one did well. REIT prices went on to rebound to new highs.
It remains to be seen whether REITs will enjoy a comparable rally this time around, but I’m liking my odds. So today, I’m going to recommend seven of the best REITs to buy for a 2017 rebound. It’s a diverse lot hailing from different subsectors of the REIT market, but all pay solid yields and all are still well below their mid-2016 highs.
In these seven REITs, which yield between 4% and 8%, investors can expect current income well in excess of what is available in the non-junk-bond market. And with a little cooperation from Mr. Market, they also offer the chance for capital gains of 20% or more.
The Best REITs to Buy for High Yield and Growth: Realty Income (O)
O Dividend Yield: 4.1%
I’ll start with one of my favorite REITs, the “monthly dividend company” Realty Income Corp (NYSE:O) because we have something of a sense of urgency here.
As much as I like this REIT, it’s been consistently too expensive for me to recommend over much of the past two years. But after the drubbing the REIT took in the second half of last year, I’d consider it quite reasonably priced, if not quite cheap.
Realty Income is probably the safest and most “bond-like” of any REIT you’ll ever find. Its properties are mostly high-traffic neighborhood retailers (think of your local Walgreens or CVS) and about as close to recession-proof as you can get. Not surprisingly, Realty Income has managed to raise its dividend for 77 consecutive quarters and shows no sign of slowing down.
I’d consider any yield above 4.5% on this stock to be spectacular and any yield above 5% to be an occasion to mortgage my house to buy more shares. Well, we’re not quite to those levels. At current prices, Realty Income yields 4.1%. That’s still quite respectable, but if you’re considering buying, I’d recommend you do so quickly. Shares have been recovering of late, and I wouldn’t want to add new shares at a yield below 4%.
The Best REITs to Buy for High Yield and Growth: W.P. Carey (WPC)
WPC Dividend Yield: 6.4%
If you like the Realty Income story, you’ll likely enjoy W.P. Carey Inc. REIT (NYSE:WPC) as well.
W.P. Carey, like Realty Income, is a retail REIT specializing in high-traffic, single-tenant properties. And W.P. Carey’s portfolio is made up of properties leased under triple-net leases, meaning that the tenant — and not the REIT — are responsible for paying all insurance, taxes and maintenance expenses. Once the legwork has been done in buying a property, management’s responsibility is essentially limited to cashing the rent checks.
Unlike Realty Income, WPC is not a pure-play triple-net lease, as it also has a non-traded REIT business. This partly explains why WPC trades at a higher yield than Realty Income (6.4% vs. 4.1%). But WPC’s portfolio is durable and recession-proof, and the REIT has been consistently able to raise its dividend over time, hiking it a cumulative 75% over the past five years.
WPC’s current yield of 6.5% is even higher than that of junk bonds these days. But really, which would you rather have? WPC’s dividend is arguably safer than junk-bond interest, and its payout actually rises over time. I personally own shares of WPC and consider it to be a no-brainer to own at current prices.
The Best REITs to Buy for High Yield and Growth: VEREIT (VER)
VER Dividend Yield: 6.3%
I’ll add one last triple-net retail REIT to the mix: the revamped VEREIT Inc (NYSE:VER).
This REIT, which used to go by the name American Realty Capital Partners, got absolutely obliterated about two years ago after a making an accounting mistake … and then committing the far graver sin of trying to hide it. In the melee that followed, the REIT eliminated its dividend, fired its entire executive team and even renamed itself in an attempt to fully clean house.
Well, so far, so good. It takes time to rebuild reputations, which is why VEREIT continues to trade at a discount to most of its peers. But the new management team has done a fine job of picking up the pieces and using them to rebuild a more durable REIT.
Importantly, the dividend was reinstated at the end of 2015, and the REIT now yields a very respectable 6.3%. VEREIT hasn’t raised its dividend since reinstating it, focusing instead on using its cash flows to strengthen its balance sheet. But I expect to see VER start raising the dividend again relatively soon.
And while we’re waiting for that, we’re still pocketing a payout you’d be hard-pressed to find elsewhere without taking a lot more risk.
The Best REITs to Buy for High Yield and Growth: Stag Industrial (STAG)
STAG Dividend Yield: 5.8%
Changing sectors, I’d also recommend light industrial REIT Stag Industrial Inc (NYSE:STAG). No, this REIT is distinctly not in the business of renting venues for wild stag parties. “STAG” stands for “single tenant acquisition group,” and the REIT owns a diversified portfolio of freestanding warehouses or light manufacturing facilities.
Stag Industrial is a young REIT, and its growth since its 2011 initial public offering has been impressive. STAG has grown its portfolio by 344% to 300 properties in 37 states. And unlike a posh hotel or shopping mall, STAG’s property portfolio doesn’t require a lot of maintenance. No one expects a gritty warehouse to look impeccable.
Let’s move on to the dividend. STAG is somewhat quirky in that it pays its dividend monthly rather than quarterly (Realty Income does as well). Some investors consider this a cheap gimmick, but in my view it shows that the REIT takes its retail shareholders seriously and tries to keep them happy. After all, a monthly dividend is far more in line with the average investor’s monthly expenses.
STAG yields just a little below 6%, making it competitive with the other REITs I’ve highlighted here. And importantly, STAG has consistently grown its dividend since its IPO. That’s not bad at all for a boring portfolio of no-frills industrial properties.
The Best REITs to Buy for High Yield and Growth: Omega Healthcare Investors (OHI)
OHI Dividend Yield: 7.6%
Let’s change gears again, moving on to health and senior living REITs.
It should really be no surprise that I’m wildly bullish on the long-term prospects of this sector. The aging of the baby boomers is one of the single most powerful trends affecting the economy today. I may have no accurate way to forecast how many burritos Chipotle Mexican Grill, Inc. (NYSE:CMG) will sell or how many F150 trucks Ford Motor Company (NYSE:F) will sell in any given quarter. But I know that hundreds of thousands of baby boomers turn 65 every month, and demand for health and senior living properties has nowhere to go but up.
This brings me to Omega Healthcare Investors Inc (NYSE:OHI), which specializes in the skilled nursing and long-term care. Omega has a long history serving the senior market, having been active in the space since 1992. Today, the REIT owns more than 1,000 properties scattered across 42 states and the United Kingdom.
At current prices, Omega yields an impressive 7.3%. Oh, and Omega also happens to be a dividend-raising monster. The REIT just raised its dividend for the 18th consecutive quarter. Given the massive demographic tailwinds the sector enjoys, I expect plenty more to come.
The Best REITs to Buy for High Yield and Growth: HCP, Inc. (HCP)
HCP Dividend Yield: 4.9%
Along the same lines, I would strongly recommend health and senior housing blue chip HCP, Inc. (NYSE:HCP).
HCP has taken its lumps of late due to some ongoing issues in its HCR ManorCare skilled nursing portfolio. But HCP largely wiped the slate clean by spinning off that part of its portfolio as a separate, standalone REIT. The new HCP is leaner, more efficient and better positioned to deliver solid returns going forward.
HCP’s long history of consistent dividend hikes made it the first REIT to be included in the illustrious Dividend Aristocrats index. However, the spinoff of the HCR ManorCare properties — and the rental income they produced — meant a dividend cut was necessary. And sure enough, HCP reduced its dividend by about 36% late last year.
Normally, I would run away screaming from a stock cutting its dividend. Just as with cockroaches, there is seldom just one. And a dividend cut is often the sign of deep problems. But in the case of HCP, I would argue this to be an opportunity. By spinning off the troubled properties and cutting the dividend, the REIT has effectively started over with a clean slate. And its dividend yield, at just shy of 5%, is actually higher than the large-REIT average.
Consider HCP a turnaround play with a respectable current yield and extremely strong demographic tailwinds.
The Best REITs to Buy for High Yield and Growth: Cohen & Steers REIT & Preferred Income Fund (RNP)
RNP Dividend Yield: 7.7%
I’m going to leave you with a treat. Rather than offer one more REIT, I’m going to offer you a entire portfolio of them via the Cohen & Steers REIT & Preferred Income Fund (NYSE:RNP).
RNP is a closed-end fund (CEF) with a portfolio split about evenly between equity REITs like those in this article and preferred stock. (For those unfamiliar with the asset class, preferred stock is essentially a bond that doesn’t have a set maturity date and pays “dividends” instead of “interest.”)
Closed-end funds are interesting for two reasons. The first is that they are able to use modest amounts of leverage to boost their returns and pay a significantly higher yield. But what I find even more attractive is that the price of the fund can wildly deviate from the value of the portfolio. Unlike ETF shares — which can be created or destroyed to force the price to parity with net asset value –the number of CEF shares are generally fixed. So you regularly get situations where a CEF trades at a price significantly higher or lower than the value of its underlying portfolio.
Well, today, RNP trades at a discount to NAV of 11%. This means that you’re effectively getting a dollar’s worth of assets for 89 cents. And it yields an attractive 7.7% to boot.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long HCP, O, OHI, RNP, STAG, VER and WPC.