Real Estate Investment Trusts (i.e. REITs) are among the best passive income vehicles due to their income tax exempt status and the requirement that they pass on at least 90% of their taxable income to shareholders. Due to their significantly reduced tax burden combined with the mandated high payout ratio, Real Estate Investment Trusts tend to pay out significantly higher dividend yields than your average stock.
Add to that the fact that their underlying business model typically consists of passively renting out very large and diversified portfolios of commercial real estate, and they are often a reliable source of income. Compared to investing in a single rental property, REITs provide investors with a much more passive, diversified, and liquid alternative for investing in real estate.
The following 3 high-yield REITs offer particularly safe and attractive income for passive real estate investors.
#1. W.P. Carey (WPC)
Perhaps the safest high-yield REIT in the market today, WPC boasts a 23-year dividend growth streak that reveals the consistency and resilience of its business model. Furthermore, while peers saw their cash flow per share plummet in 2020 during the COVID-19 lockdowns, WPC continued to grow theirs while collecting an impressive 96% of their rents in April and May of 2020. As a result, the company easily covered its dividend last year and are expected to maintain a very reasonable 85% payout ratio this year.
Moving forward, as inflation continues to heat up, WPC is particularly well positioned to benefit as 62% of their leases are CPI-linked. Their BBB credit rating, diversification across several real estate sectors, and geographic diversification across North America and Europe gives them access to capital as well as multiple investment opportunities to achieve maximum cap rate/interest rate spreads.
Lastly, W.P. Carey has significant growth momentum, thanks to $900 million in acquisitions already in 2021 at weighted average lease terms of 22 years. As a result, we expect W.P. Carey to continue growing its dividend per share for years to come. Despite these strengths, WPC still yields 5.4% in an environment where long-term interest rates are universally sub-2%.
#2. Medical Properties Trust (MPW)
MPW combines attractive yield with strong growth momentum in a defensive sector to offer investors compelling risk-adjusted income and total return potential. Normalized funds from operation (FFO) per share grew by a whopping 13.5% year-over-year in their first quarter results. The company continued to raise significant equity through at-the-market sales which it recycled into hundreds of millions of dollars of acquisitions.
Thanks to its presence across the United States, Germany, the United Kingdom, Italy, and Australia, MPW has an abundance of opportunities for raising and deploying capital to maximize cost of capital and cap rate spreads. The company also has a strong growth track record as it more than doubled its FFO per share over the past decade while simultaneously paying out and growing its fairly hefty dividend. Last year, the REIT proved its mettle by raising the dividend by nearly 4% and growing FFO per share by 9% in the face of COVID-19 headwinds.
Moving forward, MPW will likely continue leveraging its status as the only pure-play hospital REIT with many years of experience and a broad network of relationships to continue driving deal flow. With a 5.5% yield and a 64% expected payout ratio for 2021, the dividend looks very attractive and safe right now with plenty of room to grow in the years to come.
#3. Simon Property Group (SPG)
SPG is the largest retail REIT and owns a large portfolio of mostly class A malls. While the path for them has been treacherous of late given the explosive growth of e-commerce, countless high-profile retailer bankruptcies, and the COVID-19 lockdowns, SPG continues to generate attractive cash flow for investors.
Their strength derives from their large portfolio of well-located properties, their extensive network of relationships with current and potential tenants, and fortress balance sheet. Their balance sheet gives them significant liquidity and access to cheap debt that they can leverage to redevelop their properties and keep them economically viable. In contrast, many of their retail peers have fallen by the wayside and in some cases even declined into bankruptcy due to having overleveraged balanced sheets that were overwhelmed by bankruptcies and redevelopment needs.
While SPG had to slash its dividend in 2020 due to the uncertainty caused by the COVID-19 lockdowns, it recently raised it by 8% and offers investors an attractive forward yield of 4.3%. With an expected 2021 payout ratio of 57.4% and strong FFO per share growth momentum into 2022 on the back of the re-opening of the economy, the dividend looks very safe and poised to continue significant growth.
While its future remains clouded by the continued momentum towards e-commerce away from bricks-and-mortar retail, SPG has the liquidity, the assets, and the network necessary to weather the storm and emerge as the leading retail landlord of the 21st century. Between mixed-use redevelopments, strategic assets dispositions, and further integration between e-commerce and its increasingly omni-channel properties and tenants, SPG is poised to remain economically viable and a dividend-paying powerhouse for years to come.
WPC is a broadly diversified, slow-and-steady, sleep-well-at-night investment that you can count on to gradually grow your dividend income stream over time and weather economic disruptions with ease. MPW is a higher growth, niche investment that – while quite as reliable as WPC – should combine to deliver high total return and income for investors. Lastly, SPG offers investors an attractive contrarian value investment opportunity which, if it plays out well, could offer investors the most upside in both share price appreciation as well as dividend growth.
An equal weighting in all three REITs produces an average dividend yield of 5.1% that is well covered by a diversified stream of cash flows and is expected to grow meaningfully in the years to come. On top of that, WPC, MPW, and SPG each offer investors something different, making them a great place to start building your passive income REIT portfolio.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point. He is a former Army officer, land development project engineer, and a lead investment analyst at Sure Dividend and Vice President at Leonberg Capital.
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