In a low-interest rate world, it can be hard to find high-dividend payers worth buying since investors have bid up the prices of just about anything with a notable yield. Which is why you need to be extra careful when looking at dividend stocks. But don't worry, there are still some good options around; you just need to think a little more carefully about what you buy. Today Omega Healthcare Investors (NYSE: OHI), Realty Income (NYSE: O), and CoreSite (NYSE: COR) are all names that should be on your short list.
1. It's not optional
Real estate investment trust (REIT) Omega Healthcare is focused on nursing homes. This is an interesting niche in the senior housing space because the level of care provided in such facilities really isn't optional. And while the idea of releasing seniors into their own homes sounds great, often a nursing home is the lowest cost choice. This is why more Medicare patients released from hospitals go to nursing homes than any other care option, including their own homes.
The essential nature of Omega's properties helped it sail through the 2020 pandemic in relative stride. Unlike some other big-name REITs in the healthcare space, it didn't cut its dividend. To be fair, government assistance helped many of its tenants weather the coronavirus hit, but the REIT is fairly confident that this largess will continue given the critical nature of the care provided in its facilities.
Meanwhile, investors can collect a huge 7.4% dividend yield while they wait for the storm to pass. With vaccines rolling out across the U.S. and U.K., the two countries where Omega operates, that suggests things will get better rather than worse from here. This is probably the riskiest option on this list, but it is also providing the highest yield and, thus, highest dividend reward.
2. A change for the better
The next name up is Realty Income. The yield on offer here is 4.2%, which isn't huge but still well above the 1.3% you'd get from an S&P 500 Index fund and the 3.2% yield from the average REIT, using the Vanguard Real Estate Index ETF as a proxy. Historically speaking, Realty Income's yield is about middle of the road for the REIT over the past decade or so. That suggests it's fairly valued (a yield between 5% and 6% would be much more attractive, for those with more of a value focus, but you'll have to be attentive and patient to get that yield).
So Realty Income's yield is attractive relative to the broader market, but maybe not as attractive as it has been. However, there's an important bit of news you have to take into account when making the final call here. Realty Income just announced plans to buy competitor VEREIT. This move will bring together two of the largest net lease REITs, creating an industry giant with massive scale, a global reach, and material cost of capital advantages. From day one, the deal is expected to be 10% accretive to adjusted funds from operations (FFO), a REIT metric similar to earnings for an industrial company. And, given VEREIT's higher debt costs, there's additional savings to be had as that company's debt matures over time.
Put simply, this will be an important catalyst for growth and further differentiate Realty Income from its peers. It would be nice if the yield here were higher, but for those willing to buy a great company at a fair price (and still generous yield), Realty Income is a name that has to be strongly considered as it once again proves why it is the net lease industry's bellwether name.
3. The future is digital
The final name on this list is CoreSite, which offers a 4.1% yield. Like Realty Income, that's not exactly a massive absolute yield, but in this case it is at the top end of the data center peer group. Simplifying things a bit: Data centers are the properties that house all of the computer servers that make the internet work. It's a competitive sector, one that is likely to see ongoing growth as more and more of the world shifts online.
One of the things that differentiates CoreSite is that it focuses on the co-location business. This side of the industry tends to serve a large number of smaller clients that are willing to pay higher prices to ensure reliable performance. And, notably, it isn't as competitive as providing data centers to clients like Google or Amazon that can drive rents down because of their size.
So CoreSite is the high-yield way to step into the still-growing datacenter space. And, thanks to a large customer base, the risk of a client defection isn't all that large. With a decade of dividend increases under its belt, CoreSite is a worthwhile option for those seeking a healthy mix of dividend income today and dividend growth in the future.
More than just yield
It would have been easy to create a list of high-yield real estate stocks, but it wouldn't have produced a collection of names worth buying. Indeed, the highest yields often come with the highest risks. However, Omega, Realty Income, and CoreSite each have unique attributes that make their generous yields more attractive than they might at first seem. If you take the time to dig in here, you might find that one, or more, end up in your portfolio today.