November 2020 is anything but a normal time in the world, with contentious U.S. elections layered on top of a recession and a global pandemic. In the background is a U.S. stock market that remains incredibly volatile at times. What's a dividend investor to do? Look at dividend-paying real estate investment trusts (REITs). Here are three high-yield names to consider.
W. P. Carey: A jack of many trades
W.P. Carey (NYSE: WPC) is the first name up, sporting a robust 6.7% dividend yield. That dividend is backed by more than two decades of annual increases, including two so far in 2020. This real estate investment trust is in the net lease niche, which means it owns single-tenant properties for which the lessees are responsible for most of the operating costs of the assets they occupy. It's a fairly low-risk approach to owning real estate, with W.P. Carey basically just sitting back and collecting rent (that's a simplification, of course).
Although the dividend here is enticing, the really big draw is W.P. Carey's diversification. Roughly 37% of its rents come for foreign markets (mostly Europe). And it spreads its portfolio across the industrial (24% of rents), office (23%), warehouse (22%), retail (17%), and self-storage sectors (5%), with a sizable "other" category making up the rest of the rent roll.
This diversification allows the REIT to invest opportunistically in whatever property type presents the best opportunity. And when times are tough, this can lead to steady performance. While some of its net lease peers were collecting just half of their rent in the early days of the pandemic, W.P. Carey's collection rate never fell below 96% in the second quarter of 2020.
Healthpeak: A healthy position
The next name up is healthcare-focused Healthpeak (NYSE: PEAK) and its 5.4% yield. To be fair, this REIT ran into problems a few years ago when its nursing home investments were floundering because of a weak operating environment. It eventually spun them off and, effectively, cut the dividend. However, at that point it repositioned its business, focusing more on medical office and research space and purposely downplaying senior living facilities. Today roughly 30% of its rents come from medical offices, 36% from life science assets, and the rest from various types of senior housing properties.
That's turned out to be a huge benefit during the pandemic, since senior housing has been among the hardest-hit sectors. The company's closest peers both have far larger exposure to this troubled area, so diversification again looks like a big win. In fact, while competitors Ventas (NYSE: VTR) and Welltower (NYSE: WELL) both had to trim their dividends, Healthpeak has been able to hold the dividend line in stride.
That's not to suggest Healthpeak isn't facing challenges in the senior living space, only that its more diversified portfolio has been better able to handle the hit. In fact, medical office and research assets have actually been in high demand during the pandemic.
Still, senior housing still has material demographic tailwinds over the long term even if today's market is challenging, a potential opportunity for investors looking to buy when others are fearful. Healthpeak, down around 20% so far in 2020, allows you to do that with the hedge provided by its office and research holdings.
Avalon Bay: In the wrong places
The last name here, Avalon Bay (NYSE: AVB), has the lowest yield at 4.7%. However, that yield is at its highest level since the 2007 to 2009 recession, so relative to the REIT's own history, it's notable. The question investors need to ask is: why?
Avalon Bay is one of the largest apartment owners in the country, with a specific goal of owning buildings in high-barrier to entry regions with high average incomes. Basically, it buys and builds apartment assets in and near large cities. COVID-19 has been pushing people out of cities to more rural locals, and investors have pushed Avalon Bay's stock lower on concerns over its near-term outlook.
That said, the REIT has a long history of steadily increasing its dividend over time (though not annually). Notably, even during the deep 2007 to 2009 economic downturn, it didn't cut the dividend. There's no particular reason to expect a cut this time around either, as its core funds from operations (FFO) payout ratio was only 77% in the third quarter. That leaves room for additional adversity before the dividend is at risk. Meanwhile, the company's occupancy levels were a solid 93%, and it collected roughly 96% of the rent owed, as of the company’s update in September.
While it's true Avalon Bay's urban assets aren't performing as well as those located in more rural areas (largely city suburbs), the REIT's business is hardly falling off a cliff. If you can stomach some near-term uncertainty, this high-yielder is a way to play an eventual urban recovery once the world learns to live with COVID-19.
An interesting mix
If you take the time to dig into W.P. Carey, Healthpeak, and Avalon Bay, it's highly likely you'll find a REIT that could fit in your portfolio. W.P. Carey is a diversified option that has sailed through the global pandemic in relative stride, a good choice for just about any investor. Healthpeak and Avalon Bay both come with caveats. However, each is holding up well just the same. And intrepid investors can collect their generous yields while waiting for things to get better.