Real estate investment trusts, or REITs, offer investors the opportunity to invest in real estate, without having to own property. REITs are highly prized by income investors due to their tendency to pay high dividend yields. This is because REITs must pay out at least 90% of their taxable income to shareholders. The result is that it is not uncommon to see many REITs with yields of 5% or more.
But the dividend yield is not the only consideration when purchasing REITs. Investors should also assess whether the dividend payout is sustainable. The current environment is challenging for REITs due to the coronavirus pandemic, particularly when it comes to REITs that are exposed to the retail and restaurant industries.
In such a difficult environment, investors should focus on quality REITs. The following three REITs to buy have strong portfolios and have maintained their dividends through 2020.
REITs to Buy: Realty Income (O)
Realty Income is currently our top-ranked REIT due to the company’s long history of consistent dividends, even during recessions. The company recently increased its dividend, representing the 108th increase since its initial public offering in 1994. Even better, Realty Income pays its dividend each month, meaning investors receive 12 dividends per year instead of the typical four. Throughout Realty Income’s 51-year operating history, it has paid 603 consecutive monthly dividends to shareholders.
Its long track record of consistent dividends is due to its focus on high-quality real estate properties. It owns a diversified portfolio with tenants such as Walgreens (NYSE:WBA), 7-Eleven (OCTMKTS:SVNDF), Dollar General (NYSE:DG), among others. Realty Income owns more than 6,500 properties, which further indicates the diversification.
This focus on quality properties has helped Realty Income fare relatively well during the novel coronavirus pandemic. Occupancy remained strong at 98.5% in the second quarter, and has never fallen below 96%. Realty Income’s adjusted funds-from-operation, or AFFO, increased 6.7% through the first six months of 2020. It is very impressive that the company has posted growth in AFFO over the course of 2020, given the many headwinds that are facing retail real estate.
Realty Income has increased its dividend for 25 consecutive years, which qualifies it as a dividend aristocrat, an exclusive group of stocks in the S&P 500 Index with 25-plus years of dividend increases. There are only 65 dividend aristocrats. Realty Income shares currently yield 4.6%, and while there are other REITs with higher dividend yields, few can match Realty Income’s dividend safety and track record of stability. Realty Income is one of only two REITs that are on the list of dividend aristocrats, and also have at least two credit ratings of A3/A- or higher.
STAG Industrial (STAG)
STAG Industrial is an attractive REIT for long-term investors because it is in unique position to benefit from many of the shifting trends that are hurting so many other REITs. Specifically, STAG will capitalize on the e-commerce boom, which has had a pronounced negative impact on REITs that rely on brick-and-mortar retailers.
As its name suggests, STAG owns industrial real estate properties. These include distribution centers, logistics facilities and others that are seeing demand rise due to the rise of internet retail. In fact, Amazon.com (NASDAQ:AMZN) is STAG’s biggest tenant, representing 2.5% of its annualized base rental revenue. Approximately 43% of STAG’s portfolio handles e-commerce activity.
Its portfolio is spread across multiple industries and geographies. It focuses on single-tenant industrial properties and has approximately 450 buildings across 38 states. The focus of this REIT on single-tenant properties might create higher risk compared to multi-tenant properties, as single-tenant properties are either fully occupied or completely vacant. However, STAG Industrial executes a deep quantitative and qualitative analysis on its tenants.
As a result, it has incurred credit losses that have been less than 0.1% of its revenue since its IPO. As per the latest data, 54%of the tenants are publicly rated and 31% of the tenants are rated investment-grade. The company typically does business with established tenants to reduce risk.
Because of its exposure to e-commerce, STAG has thrived during the coronavirus pandemic. Over the first half of 2020, STAG grew core FFO by 4.4% as same-store cash NOI increased 2.3% compared with the same period in 2019. The company is hardly having any tenant issues, as just 2.8% of its July base rental billings were deferred.
STAG does not have an extremely long operating history, as the company had its IPO in 2011. But it has had success even in the short time in which it has been a publicly-traded company. STAG Industrial has grown its FFO at a 5.7% average annual rate in the last seven years. It still has a market share that is less than 1% of its target market. Therefore, it has ample room to continue to grow for years, which will in turn result in continued dividend growth.
STAG last increased its dividend in January 2020, and it is likely the company will raise the dividend again in early 2021. Shares currently yield 4.7%, and like Realty Income, STAG pays its dividend monthly instead of the more typical quarterly payout schedule.
W.P. Carey (WPC)
W.P. Carey is another REIT with an impressive track record of steady dividends and growth. It owns commercial real estate properties such as industrial, warehouse, office and retail properties. In all, W.P. Carey owns a portfolio of more than 1,200 properties in the U.S. and Europe, which had 98.9% occupancy as of the most recently reported quarter. It has a diversified tenant list – the top 10 tenants comprise 21.6% of annualized base rent. Some of W.P. Carey’s top tenants include U-Haul (NASDAQ:UHAL), Hellweg, and Advance Auto Parts (NYSE:AAP).
W.P. Carey has remained stable over many years, including various downturns such as the Great Recession and the current pandemic. Since 2008, W.P. Carey’s occupancy never fell below 96.6%. This is due to the company’s focus on tenants that operate non-cyclical businesses, which also tend to see stable traffic during recessions.
It also helps that W.P. Carey has maintained a healthy balance sheet over the years. For example, W.P. Carey has investment-grade credit ratings of Baa2/stable from Moody’s and BBB/stable from S&P. One consideration for investors is that W.P. Carey’s pro-rata net-debt-to-adjusted EBITDA ratio remains elevated at 6.0x. But the company continues to be able to service its debt and return cash to shareholders, thanks to the resilience of its property portfolio.
W.P. Carey’s fundamentals have held up well throughout 2020. Adjusted FFO from the company’s real estate portfolio increased 0.9% through the first half of 2020, as real estate rental revenue increased 0.8%. The company maintained a portfolio occupancy rate of 98.9% for the 2020 second quarter. W.P. Carey has withdrawn its full-year guidance, but it is likely the company will see only a modest decline in FFO for the year. This will allow W.P. Carey to continue returning cash to shareholders through dividends.
The company has a proven history of steady dividend growth. W.P. Carey has increased its dividend every year since going public in 1998. Shares currently yield 6.4%, a very attractive payout for income investors as the S&P 500 Index yields just 1.8% on average right now. Therefore, W.P. Carey stock has appeal for investors looking for high yields and a safe payout.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.