Even with the broader real estate trust stocks down 12% so far this year, the dividend REITs I’m about to show you are up more than four percent and beating the market by fourteen!
These REITs offer not only that upside potential but also a solid dividend cash flow and the opportunity to diversify your investments away from stocks.
In this video, I’ll share the five best dividend REITs to watch and the one every investor should be buying. It’s the seventh in our Just One Stock series, if you could only invest in one stock in different themes, which should it be! Going to cover all the strategies here from value to growth, tech stocks and by the end of the series, you’ll have a portfolio of the very BEST stocks to buy!
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Up until now, we’ve focused the series on stocks and that’s going to be the biggest part of your portfolio but now we’re getting into an entirely new asset class and that’s more important that most investors realize. I want to get into our list of dividend REITs so I’ll explain why that is later along with what to look for in real estate stocks and that best REIT for your portfolio.
5 Best Dividend REITs to Watch
First on our REIT list is one I’ve been watching closely this year, Gaming and Leisure Properties, ticker GLPI, with its 5.4% dividend yield.
The company owns 52 properties in 17 states, many without a competitor for more than 60 miles. Its casinos are operated by some of the biggest names like Caesars, Boyd and Penn National with gaming and over 15,000 hotel rooms.
Besides the growth in gambling, we’re just starting to see across the U.S., I really like the company’s strategy. It contracts with operators on a triple-net basis, so the casinos pay all costs including maintenance. Strong contract terms mean GLPI has been able to keep 100% occupancy since inception.
The property type got hit hard in the pandemic but free cash flow is already on its way higher. The company generated $728 million in FCF over the last year, nearly double the $424 million in 2020 free cash flow and above pre-pandemic as well. I feel like the pandemic wiped out the weaker REITs and casino players in the industry, leaving leaders like GLPI to take that market share and emerge stronger.
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Besides that, strong dividend REIT yield, shares are beating the market by nearly 20% so far this year and I really like the growth story here.
We’re just getting started and I feel like if you clicked through to a video on dividend REITs…I probably don’t have to convince you why you should be investing in these. Maybe I’m biased since my first internship was as a commercial real estate analyst but Nation, no other investment has created as much legacy wealth as real estate.
Not only does real estate offer high returns and a way to smooth out some of the risks you get in stocks but REITs offer an easy way to invest, trading just like stocks without the tens of thousands you need for a down payment.
How Much You Should Invest in Dividend REITS
As for how much you should invest in dividend REITs, it’s going to depend on how much safety and cash flow you need. I would say at a minimum, maybe ten- to fifteen-percent of your wealth in real estate or REITs. If you want more cash flow or just to diversify your stock portfolio a little more, maybe you go to twenty-five or thirty-percent in REITs while younger investors that want more growth might go with the lower allocation.
Blackstone Mortgage Trust, ticker BXMT, is one of the few mortgage REITs to be holding up this year and I like being able to add that mortgage component to the list.
Remember, instead of owning property like traditional REITs, mortgage REITs borrow on short-term rates then leverage that money three- and four-times with debt to invest in mortgages. So, the mortgages may only pay a 4% interest rate but with leverage, mortgage REITs can cash flow to pay a higher dividend like Blackstone’s 8.2% yield.
The REIT holds 157 loans for a portfolio of $22 billion and originated $4.7 billion in loans just last quarter, so it’s growing consistently and the dividend is fully covered by earnings.
Just under half the portfolio is in multifamily loans with another 29% on office space but you’ve got some diversification here with the remaining third in other property types and across the U.S. and Europe.
Mortgage REITs have been hit this year because higher interest rates on new loans means the old loans are worth less to investors. Mortgage demand has also slowed down as rates increase and home buyers get squeezed. It’s likely to get worse before it gets better and we’re already seeing the smaller mortgage companies go out of business. Blackstone Mortgage is well capitalized and has the liquidity of a giant investment powerhouse behind it.
Blackstone did well throughout the pandemic with the loan-to-value on the portfolio never exceeding 66% so high-quality real estate loans here. It’s increased earnings consistently and book value has grown to just under $27 a share, which means the stock trades for a fairly cheap 1.1-times book.
While the shares are down slightly on the year, it’s still outperforming the overall market and producing a positive return when you add in the 8% dividend yield. It’s a great one to consider if you’re looking for higher yields but are worried about some of the weaker mortgage REITs.
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Realty Income, ticker O, isn’t the strongest dividend REIT on the list but this one is extremely popular for its monthly dividend so I wanted to cover it here.
Realty Income is the only REIT in the Dividend Aristocrats list with annual dividend increases since 1994, in fact a 4.4% annualized increase in the dividend over nearly 30 years and a double-digit shareholder return.
The company owns over 11,000 properties in the retail space so is going to see weakness on any drop in consumer spending in a recession but these are diversified across every industry within retail from grocery to convenience, dollar stores and restaurants so not only do you have some good diversification here but many are in industries with more stable cash flows than your cyclical retailers like apparel and electronics.
An interesting development lately is that Realty Income has started expanding internationally with 225 properties in the UK and Spain. Now we’re seeing quite a bit higher inflation in Europe so consumer spending is going to fall there but the portfolio represents less than two percent of the company’s total properties so not something that is going to hurt the shares and I like the idea of international growth for the future.
This is another REIT operating on that triple-net lease strategy, so the tenants pay all property costs, which makes for lower operating costs for the REIT and average lease length is at nine years so long-term leases to keep that cash flow stable. Realty Income has been able to maintain a 98% occupancy rate, more than 4% above the REIT average, really speaking for its careful process in leasing.
The dividend is lower than most on our list at just 4% but it’s a monthly payout which a lot of investors like and shares are in positive territory this year, beating the market by more than twelve percent.
Next on our dividend REIT list, I wanted to highlight some REIT ETFs instead with the Invesco Premium Yield REIT, ticker KBWY, with its 5.5% dividend, and the Invesco Equal Weight Real Estate ETF, ticker EWRE, with its 2.6% yield.
These haven’t done as well as the individual REITs in the list but since they’re funds, they give you instant diversification across property types. For example, the KBWY invests across small- and mid-size REITs and include some of my favorites like Omega Healthcare, Gladstone Commercial and GLPI.
So not only do you get a strong 5.5% dividend yield but some growth potential on smaller REITs and the stability across many different property types.
The equal weight fund holds more of the larger REIT companies and offers even better diversification with some great names like Duke Realty, Extra Space Storage and Prologis.
You might consider picking one or two of the individual REITs you really like then also putting some money in one of the ETFs to spread your investment across multiple property types.
The KBWY has outperformed so far this year with a loss of just 6.8%, a loss but not as bad as stocks in the S&P 500. The Equal Weight REIT has performed right along with the market but still provides a better dividend.
What to Look for in REIT Stocks
We’ll jump back into our list but I want to show you what to look for in REIT stocks, how to decide which fit your portfolio best. We’ve talked about some of the analysis measures before like Funds from Operations but here I want to give you a bigger picture overview.
The first thing you want to look for is, what type of property does the REIT buy so is it office space, warehouses, self-storage, retail or data centers. This is important because most REITs specialize in just one property type so you really need a good outlook on that or to build a portfolio of REITs around different types.
Next you want to look at where the REIT invests. Most are focused on the U.S. property market but even in that, it helps to find one with properties spread across a region or nationally. It’s important because a REIT with properties in just a few states could get hit if the economy there struggles or if a natural disaster hits.
Tenant diversification is another important factor and all of these are going to be available on the REIT’s investor relations page. Type in Google for the company and investor relations to find it and here you’re going to find a company presentation or other docs showing you the property types, tenants and other financials.
This idea of tenant diversification is important because you don’t want any single customer to be more than 10% of the REIT’s business just in case that tenant bankrupts. Here we see the breakdown for Realty Income and you see even at the most, Walgreens is just 4% of total rent and the REIT is spread out by business type and by state.
Also in the investor presentation, you’ll find the occupancy rate for the properties as well as its historical rate. The higher the better here but more important is just the consistency in occupancy. You don’t want to see any big drops that could signal weakness in managing the properties and it’s great if it can be able that average occupancy around 94% for large REITs.
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The ONE Dividend REIT Stock You Should Invest
I also want to share a resource for following REIT stocks. If you search on Google for NAREIT property returns or returns by property, you’ll see this Performance by Property Sector and Subsector from the National Association of REITs. You can download the data in excel or I just like looking at the online version and it’s a great resource, totally free, for following the returns to each property type.
That’s really important when you’re looking at real estate stocks because the returns and outlook on one property type can be far different from others so you need to think of this not in terms of all REITs together but what are the property types you like and the companies within each.
For example, here you see in that report that all equity REITs are down an average of 12.2% so far this year with regional malls down 30% and even relatively safer healthcare down 4.6% but you can see how this can help guide your investment. Self-storage REITs surged 79% last year and I warned investors earlier this year on valuations to avoid the space and here we see they are down double-digits so far. I still like healthcare on the long-term trends and even on a slight loss, it’s helped protect your portfolio from the worst in stocks and some of these other property types.
Before I reveal that best dividend REIT, I want to get your input on this. Which is your favorite property type in REITs or which stock do you like best for the group? So scroll down and let me know in the comments, how are you investing in REITs?
And my top dividend REIT, maybe not for the reason you’re thinking though, is WP Carey, ticker WPC, with its 4.8% dividend yield.
WPC is a $17 billion REIT with great diversification by property type; in fact, pretty evenly spread across industrial, warehouse, office and retail space. Most of the portfolio is in the U.S. though it does hold just over 35% of the properties in Europe which gives it a great geographical diversification.
And that diversification is really why I like WPC for a best dividend REIT if you’re buying just one in the space. All five REITs are strong companies, offer some great dividends and are good investments but if you’re only buying one REIT then you need that diversification in property type you get from WPC. With GLPI, you’re only getting casino, with Realty Income, you’re only getting retail, with Blackstone it’s mortgages, but here with WPC it’s across several property types and even that international diversification.
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The company collects over $1.1 billion in annualized base rent and books 98% occupancy over 131 million square feet across more than 1,100 properties. WP Carey has topped expectations for funds from operations over the last four quarters, reporting an FFO of $5.33 over the last year so trading for about 16-times on a price-to-FFO basis which is a good value versus the 18-times FFO you see across REITs.
And the shares have done really well this year, producing a 7% return above the dividend yield and beating the market by 17% so a solid performance.
Check Out the Entire REIT Stocks Series