Real estate investment trusts (REITs) are income stocks at heart. They have to be since they need to pay out 90% of their taxable net income via dividends to remain in compliance with IRS regulations. Because of that, the sector is an excellent spot for income-focused investors. While not all REITs pay reliable dividends, many do.
Three great REITs for those seeking a dependable income stream right now are Duke Realty (NYSE: DRE), Realty Income (NYSE: O), and Medical Properties Trust (NYSE: MPW). Here's why they look like excellent income stocks to buy for the long haul.
A logical choice for income investors
Duke Realty checks all the boxes for income investors. The industrial REIT pays an above-average dividend (it currently yields 2.7% versus 1.6% for the S&P 500). Further, that payout is on rock-solid ground. Driving that view is the REIT's high-quality portfolio leased to financially strong tenants (it’s on track to collect 99.9% of the rent it billed so far this year). It also has a conservative payout ratio (67% of its FFO in 2020 is at the low end of its 65% to 75% target range) and a top-tier balance sheet (high BBB+ rating with lots of liquidity). Finally, the company has a solid history of increasing its dividend. It recently raised its payout by 8.5%.
That dividend growth seems likely to continue. In Duke's view, it can grow its cash flow at a high single-digit rate in the coming years as it continues to expand its portfolio of logistics properties. The company recently enhanced its growth outlook by signing several deals to develop new facilities for tenants. It has also started several new speculative development projects. When combined with the company's healthy financial profile, that visible growth pipeline should enable Duke Realty to continue growing its dividend over the next few years.
The definition of dividend dependability
Realty Income is an aptly named REIT. The retail REIT has made 606 consecutive monthly dividend payments. Even better, the company has increased its payout 109 times since its initial public offering in 1994, including in the last 93 straight quarters. Overall, it has grown its payout at a 4.4% compound annual rate.
The dividend seems likely to continue rising in the future. While the company primarily owns retail locations, it focuses on those leased to investment-grade tenants. Because of that, it has collected more than 93% of the rent it billed in recent months. Meanwhile, it has plenty of cushion in its dividend payout ratio (which averaged 85.7% during the third quarter) and one of the strongest credit ratings in the REIT sector. Because of those factors, it has plenty of financial flexibility to continue making acquisitions that should grow its portfolio, cash flow, and 4.6%-yielding dividend.
A healthy dose of income
Healthcare REIT Medical Properties Trust pays an attractive 5.2%-yielding dividend. It's a well-supported payout as the REIT generates stable income -- it's on track to collect 100% of the rent it bills this year -- and it has a conservative payout ratio of 64% of its normalized FFO. Meanwhile, it has a reasonable leverage ratio for a REIT.
That healthy financial profile gives Medical Properties Trust plenty of financial flexibility to continue expanding its hospital real estate portfolio. The REIT is on track to invest $3 billion this year and expects 2021 to be a strong year as well. Because of that, the company should be able to continue growing its dividend, which it has done in each of the last seven years.
Great ways to generate income from real estate
Duke Realty, Realty Income, and Medical Properties Trust all pay above-average dividends that they back with rock-solid operations and financial profiles. Because of that, they have the flexibility to continue expanding their real estate portfolios, which gives them more cash to pay dividends. That makes them ideal options for investors seeking income from the REIT sector.