Real estate investment trusts (REITs) have been one of the top-performing asset classes of the past few decades, and in fact, the very best one over the past 15 years.
These owners of commercial real estate — apartments, office buildings, strip malls and more — offer high yield potential. That’s because to qualify for certain lofty tax benefits, they have to kick out at least 90% of their taxable income in the form of dividends to shareholders. Typically, REITs throw off high yields between 4% and 7%.
And as rents have increased over the years, so have REITs’ cash flows, and so have their dividends.
Naturally, the demand for these high-yield dividends has helped drive capital gains in REITs, making them a one-two punch of total returns. According to JPMorgan Asset Management, REITs have returned an average of 12% per year from 2000 through mid-2016; “that crushed the No. 2 finisher, high-yield bonds, which returned 7.9%,” the Wall Street Journal reported.
However, investors are still woefully underweight in REITs, and they’re also short on understanding. The thing is, many investors chase the sky-high yields in REITs, but don’t pay attention to one thing that has quietly driven many of those returns: increasing dividends. Over time, a smaller yielder that grows its payout robustly will overtake a current high yielder that lets its dividend languish or only polishes it with fractional hikes.
So today, we’re looking at seven of the best REITs to buy right now — they yield as much as 8%, and they’re focused on growing those payouts, too. In order of yield …
Boston Properties (BXP)
BXP Dividend Yield: 2.3%
OK. We’re starting with a headline yield of 2.3%, which is boring, but also misleading.
Bear with me.
Boston Properties, Inc. (NYSE: BXP) owns 164 high rise office buildings in five key markets: Boston, New York, Princeton, San Francisco and Washington. There’s a premium on BXP stock because … well, owning a portfolio of high rises in downtown Manhattan or L.A. commands a premium.
See, those five areas weathered the Great Recession better than most, and have continued to see economic growth since. And those premier properties continue to be in high demand. That has translated into strong (albeit inconsistent) dividend growth over the years — 36% over the past five years, in fact.
However, that dividend growth and strong property demand also have driven capital appreciation, which has kept the headline yield low.
Management seems plenty aware that its dividend yield is pretty low by REIT standards. That’s why BXP has started to pay out year-end special dividends some years — specifically, whenever it prunes its portfolio. For instance, in 2014, it paid out a monster special dividend that equated to a 5.4% yield — and that was on share prices at the end of the year based on a huge run in the stock.
The company didn’t pay one last year, in part because it was on the prowl for more properties, and in part because it opted instead to institute a big hike in the regular payout, from 65 cents quarterly to 75 cents quarterly.
So ignore the small headline yield — BXP knows how to reward investors.
UDR, Inc. (UDR)
UDR Dividend Yield: 3.4%
Two big items to look at when evaluating REITs are size of the portfolio, and where that portfolio is located.
Apartment owner UDR, Inc. (NYSE:UDR) has both areas covered.
UDR is one of the biggest apartment REITs around, with nearly 50,000 apartments under its umbrella. That’s pretty diversified just by waking up in time, and protects UDR in the event that more than a few of its tenants don’t pay the rent on time.
But what I also love about UDR is the quality of the portfolio’s locations. The vast bulk of its apartments are located in high-income, high-demand metro areas including Boston, Los Angeles, New York City and Washington, D.C. That allows UDR to charge much higher rates — especially for “luxury” properties — than other REITs that operate in, say, the Midwest or the Southwest. And it puts this trust in key position to profit from the continued high cost of living in these areas, as well as their expansion.
UDR has delivered strong results over the years, and it’s also not shy about dividend hikes. The payout has grown just more than 40% since 2012, including the most recent hike in March to 31 cents per share.
Public Storage (PSA)
PSA Dividend Yield: 3.6%
While most office buildings, apartments, and shopping malls are vastly owned by big-time real estate firms, storage units are very much still in the hands of mom-and-pop organizations, with few exceptions.
One king-sized exception is Public Storage (NYSE:PSA), a $38 billion REIT that has free rein to crush the competition.
Think of this A-rated dividend stock as a great white shark in a backyard swimming pool.
Public Storage owns thousands of locations, totaling more than 142 million net rentable square feet of real estate. And PSA has been on fire since the recession, benefiting from America’s housing crisis both because of the trend toward downsizing and the growth in the number of renters.
This trend isn’t going anywhere. Public Storage reported a 12.4% year-over-year increase in earnings for all of 2016, the bulk of which was credited to rent growth. That has poured into funds from operations (FFO), which go toward paying the dividend. And PSA has grown its distribution like a weed. The payout has soared more than 80% in just the past five years, and it has exploded by 800% since 2000.
Public Storage is among the best REITs in the country given its wide moat, dividend expansion and the strong trends still propelling growth in self-storage.
Tanger Factory Outlet Centers (SKT)
SKT Dividend Yield: 4%
The headlines say retailers are dying, and that’s true — to an extent. But brick-and-mortar is surviving in some places. You just need to know where to look.
And you can start your search at Tanger Factory Outlet Centers Inc (NYSE:SKT).
Tanger is one of the biggest names in outlet shopping, where manufacturers sell their wares directly to the public, and it’s an old dog, getting its start in 1981 and becoming the first publicly traded outlet firm when it listed in 1993.
Today, SKT owns a portfolio of 44 outlet shopping centers located in 22 states. Many of these outdoor shopping plazas are located in higher-income areas, and feature amenities to keep luring shoppers back for the bargains.
It seems to be working — Tanger boasts high and steady occupancy rates as well as a strong rent growth profile.
More importantly, Tanger has managed to pay a cash dividend for 93 consecutive quarters and has raised its dividend each of 23 years since becoming a public company. At 4%, the initial yield at SKT isn’t super-high, but the payout has grown 57% in the past five years. The potential for higher payouts as well as capital appreciation makes this an ideal choice among REITs.
Realty Income (O)
O Dividend Yield: 4.3%
Many consider Realty Income Corp (NYSE:O) to be among the best REITs to buy, if not the absolute best there is. The company just paid out its 560th consecutive monthly dividend, and has increased the distribution 91 times.
Realty Income has truly earned its self-proclaimed title of “The Monthly Dividend Company.”
Driving that steady dividend has been O’s extensive portfolio of the free-standing real estate. Realty Income owns more than 4,900 properties across the entire U.S., and they house commercial tenants with real staying power, such as CVS Health Corp (NYSE:CVS), Dollar General Corp. (NYSE:DG) and 7-Eleven.
The real kicker is that most of Realty Income’s agreements are so-called “triple-net leases.” These push the responsibility of taxes, maintenance and other fees associated with renting the property onto the tenants. That means better margins for O, and bigger dividends for U … er, you.
Realty Income also made a small move lately that I like — retiring more than $410 million of Class F preferred stock in an effort at deleveraging. This will help O’s financial flexibility going forward.
This REIT has increased its monthly dividend 44% since 2012, and is among the most relentless dividend stocks on the market.
Stag Industrial (STAG)
STAG Dividend Yield: 5.7%
The continued rise of e-commerce — and potential manufacturing gains under President Donald Trump — should give a long-term boost to REITs like Stag Industrial Inc (NYSE:STAG) that own warehouses and light industrial properties.
Stag’s strategy is unique in the space. The firm typically will buy properties on the cheap on below-replacement costs. This is good for margins, but the thing is, properties like this are often cast aside by other companies because the quality isn’t the best. Conversely, a warehouse rented out to someone like Amazon.com, Inc. (NASDAQ:AMZN) should go for a big premium.
Stag’s solution is to get big and find safety in diversification, constantly acquiring properties to provide a buffer by scale. Since its 2011 IPO, STAG has widened its number of properties by a whopping 370%, to 341.
Funds from operations continue to rise, as does the dividend on STAG stock. This REIT has grown its payouts by 35% since its 2011 IPO, and that includes a shift from quarterly to monthly distributions.
Blackstone Mortgage Trust (BMXT)
BMXT Dividend Yield: 8%
Not all REITs own physical properties. Some invest in or own mortgages and loans tied to buildings. These are called mortgage REITs (mREITs), and thanks to their “riskier” profiles and ability to leverage, they often yield much more than traditional REITs.
Take Blackstone Mortgage Trust (NYSE:BMXT), one of the best REITs among is one of the best.
Sponsored by private equity group Blackstone Group LP (NYSE:BX), BXMT originates and acquires senior loans collateralized by properties in North America and Europe. The mREIT focuses its attention on the commercial side of properties, so it isn’t exposed to residential housing.
The keyword in this strategy is “senior” — BXMT will only invest in mortgages that get first dibs on a property if the owner files for bankruptcy.
What’s striking is that BlackStone Mortgage Trust has stuck to this strategy, unlike many other mortgage REITs, which have switched to less secure mortgages. Because of that focus on top quality, what you see is what you get with BXMT.
And what you see is a high-yield dividend that has grown significantly in just a few years. The quarterly dividend has fattened from a 27-cent payout in 2013 to 62 cents quarterly. The only thing I’ll note is that the payout has been stuck at 62 cents per share since mid-2015, so it’s due for another bump. Given BXMT’s improving financials, I’m hopeful we’ll see one soon.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.