The real estate investment trust (REIT) industry is known for offering investors high dividend yields. That makes sense, since REITs are specifically designed to pass income to shareholders through dividends.
But if you’re looking for the most reliable dividend-paying REITs, you’ll want to focus on Federal Real Estate (NYSE: FRT), Real estate income (NYSE: O)And Essex Real Estate Trust (NYSE: ESS)all of which invest in different types of institutional real estate. Here is an introduction to each.
Federal Realty’s portfolio is small, but the results are huge
Federal Realty’s dividend yield is about 3.8%. That’s well above the 1.2% you’d get from a S&P 500 index fund and roughly in line with the 3.9% average yield of REITs. But the big story here is that Federal Realty has increased its dividend by a massive 57 years. That makes this REIT a Dividend King. It is currently the only REIT to achieve that status, suggesting you can own it and sleep soundly.
Interestingly, Federal Realty takes a different approach to its portfolio than most REITs. Typically, REITs grow by buying more properties. Federal Realty’s portfolio only has about 100 shopping centers and mixed-use properties. But they’re really good properties in markets with high barriers to entry and that are full of high-income customers. Essentially, Federal Realty owns retail assets in locations where retailers want to be. The results speak for themselves, as far as dividends go.
Federal Realty’s operating performance will wax and wane over time, as its operations are directly tied to the performance of its tenants (which are affected by the ups and downs of the economy). But if you’re looking for landlords with a proven track record of success throughout the economic cycle, Federal Realty is the place to start in the shopping center sector.
Realty Income is #2, but also #1
NNN REIT is the net lease REIT with the longest streak of annual dividend increases to its name, at 35 years. A net lease requires tenants to pay most of the operating costs at the property level. NNN REIT yields 4.8% and is a great “sleep well at night” REIT.
But Realty Income is the 800-pound gorilla of the net lease sector, weighing in at about four times the size of its next-largest competitor (which, by the way, isn’t NNN REIT). Realty Income has increased its dividend for 29 years, which is still pretty impressive, and its dividend yield is a slightly higher 5%.
Simply put, if you prefer to own the biggest and best companies in a sector, Realty Income is the REIT to buy, even though NNN REIT has a longer dividend streak. There are a couple of reasons for this. Realty Income’s size (it owns a whopping 15,400 properties) gives it privileged access to the capital markets and the ability to do deals that smaller competitors can’t. Realty Income’s size also means it has more diversification, but that goes well beyond the number of buildings it owns.
Unlike NNN REIT, which focuses exclusively on single-tenant retail properties in the U.S., Realty Income owns retail, industrial and other assets (notably casinos and data centers). Realty Income also has exposure to European markets, where net lease assets are still a relatively new category. That should provide a material runway for future growth. Conservatively managed Realty Income is the name to beat in net leases, and the high-yield REIT could easily find a home in any conservative dividend portfolio.
Essex Property Trust targets an attractive market
Essex Property Trust is the toughest REIT to buy on this list, because of its business model. But first, some stats. Essex has increased its dividend annually for three decades. The dividend yield is 3.2%, which is a bit low for a REIT but still high relative to the broader economy. The big selling point, though, is that the dividend has grown at a compound annual rate of just over 6% over the past decade. That’s about twice as fast as Federal Realty, NNN REIT, and Realty Income.
Essex Property Trust is essentially a growth and income stock or a dividend growth stock. That’s not a bad thing — unless your sole focus is on generating the highest possible income from your portfolio. Over time, strong dividend growth can translate into a very attractive return on the purchase price. That’s the first hurdle investors must overcome.
Essex Property Trust also owns apartments and is heavily focused on tech-driven markets on the West Coast. The latter is the big problem, because Essex Property Trust is not that diversified. Apartments are a reliable asset class, since a home is a necessity, and Essex Property Trust operates in markets with limited supply and strong demand characteristics.
This approach has clearly paid off over time. To own it, however, you have to understand that a tech downturn on the West Coast could cause undue pain to this REIT’s business. If history is any guide, though, that hasn’t been a big deal given its impressive dividend streak.
Sleep well at night, for ten years or more
All of the REITs highlighted here have multi-decade dividend streaks, and there’s no reason to think those streaks will end anytime soon. They all offer slightly different investment angles, from shopping malls to apartments. And they all have generous yields, though Essex Property Trust is probably best viewed as a dividend growth stock.
If you’re a dividend investor looking at the meager yields of the S&P 500 index, you’ll likely find all of the REITs here to be attractive sources of income, both today and in the years ahead.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Buy These 3 High Yielding Dividend Stocks Today and Sleep Easy for a Decade was originally published by The Motley Fool
