As interest rates rise, bonds will pay higher coupon rates and will become more appealing to investors. This means that the other investments they have relied on for yield will be less appealing in comparison.
Last fall’s jump in rates caused the stocks of many leading real estate investment trusts to underperform. Yet REITs have many benefits. They pay yields that can far exceed other publicly traded firms. The ones we’ll cover below pay dividend yields close to 4%.
And while interest rates are ticking up, the yield on the 10-Year Treasury Bond is still only 2.4%. That makes it pretty hard for investors to grow their wealth over time. REITs pay decent yields, and are also investing in new properties to grow.
REITs offer a compelling combination of growth and income. It will be some time before interest rates increase to the level where investors can gain yield and grow their wealth, which means REITs should remain en vogue for many years to come.
Below are three REITs with compelling total return potential going forward.
Best REITs for Sky-High Total Returns: Macerich (MAC)
Dividend Yield: 4.2%
A couple of years ago, mall real estate giant Simon Property Group Inc (NYSE:SPG) tried to buy smaller rival Macerich Co (NYSE:MAC) for a total offer value of $16.8 billion. MAC fought against the deal, saying it undervalued its company and growth prospects. In a huff, Simon said it couldn’t engage Macerich, and pulled the offer.
In hindsight, the deal would have been a good one for MAC shareholders. The offer price at the time was $95.50 per share. Shares of Macerich haven’t even traded close to that level since the deal was cancelled. They were recently quoted at $66.58 and are bumping down toward their lows over the past year.
MAC’s market capitalization (shares outstanding multiplied by the stock price) is currently $9.6 billion. Simon’s is $56.6 billion. Given its smaller size, Macerich should be able to grow faster, and this is proving to be the case. Over the last three years, average sales and profits growth have been right around 13% annually.
MAC, like its larger rival Simon, has a reputation for owning some of the best retail and mall real estate in the country. It is also shifting to higher-end outlet locations, which we’ll get to more below.
The stock’s current dividend yield is 4.2%, which is about double the average of the S&P 500. Like many REITs, the company relies on raising debt to fund its dividend and balance maintaining and buying additional properties with the cash it generates from its operations. But cash generation has been improving steadily.
Best REITs for Sky-High Total Returns: Tanger Factory Outlet Centers Inc. (SKT)
Dividend Yield: 3.8%
One of the concerns for mall and retail REITs is that brick-and-mortar retailers are struggling these days. Consumers are increasingly relying on Amazon.com, Inc. (NASDAQ:AMZN) and other online retailers for shopping, and this has been at the expense of the traditional strip mall and regular mall operators.
Sears Holdings Corp (NASDAQ:SHLD) continues to close locations, and Macy’s Inc (NYSE:M) is considering closing underperforming locations. Yet discount retailers, including TJX Companies Inc’s (NYSE:TJX) TJ Maxx and Marshall’s chains, are holding up quite well.
For decades now, Tanger Factory Outlet Centers Inc. (NYSE:SKT) has successfully developed and operated outlet shopping centers throughout the United States. Its approach has proved surprisingly resilient during economic ups and downs — it appears that consumers love a deal, regardless of if the economy is firing on all cylinders.
SKT’s sales growth has been decent in recent years. Rather consistently, the top line increases in the high single digits every year. Management generally opens one or two new outlet malls per year. This boils down to about $1 per year in reported profits, which is just about enough to support the dividend payout.
The company’s current dividend yield is 3.8%, and should grow steadily over time along with the new properties. SKT stock could also hold up well if the business cycle heads downward and the economy dips into a recession. This is when consumers really start to look for a deal on their purchases.
Best REITs for Sky-High Total Returns: Realty Income (O)
Dividend Yield: 4.1%
Realty Income Corp (NYSE:O) invests in commercial real estate in the United States. Investors really like the fact that it pays its dividend on a monthly basis. Most other firms pay it on a quarterly basis.
Realty’s current dividend yield is 4.1%, and like Tangers, its dividend is pretty well covered by the cash it operates from its real estate portfolio. Growth has been stellar for more than a decade now; over that span, O’s sales are up nearly 18% annually.
The downside of Realty Income’s past growth and consistency of its payout is that the valuation is pretty lofty. The company is projected to report just over a dollar in reported profits, and the O stock price is north of $60 per share currently.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.