The raison d'etre for investing in real estate investment trusts, or REITs, often includes the dividend they pay as much as the growth opportunity presented by the stock prices themselves.
That payback is often expressed in terms of yield, which is simply the dividend payments expressed as a percentage of the stock’s ever-changing price. So, simply shopping for an investment based on yield alone can be problematic, since a beaten-down stock price can push that percentage up while obscuring the fact there could be fundamental problems with the company itself. These problems could result in the dividend being reduced or eliminated and/or the stock not rising again soon, if ever.
That’s where the idea of a yield trap comes along. To avoid them, investors looking to hold on to a stock for its income are well served to consider stocks from REITs that have a history of doing well and are in a position to keep it up.
Here are three to consider: Starwood Property Trust (NYSE: STWD), AGNC Investment Corp. (NASDAQ: AGNC), and Omega Healthcare Investors (NYSE: OHI).
Starwood Property Trust
Based in Greenwich, Connecticut, Starwood Property Trust claims the title of largest commercial mortgage REIT (mREIT), with a portfolio of more than $17 billion. Part of privately held Starwood Capital Group, publicly held Starwood Property Trust focuses on originating, acquiring, financing, and managing commercial mortgage loans and other commercial real estate debt investments.
Starwood Property Trust was yielding 9.41% as of its Feb. 5 closing price of $20.41. This stock has been a hallmark of consistency, paying $0.48 per share since the first quarter of 2014.
Another indication of its stability is the other half of the yield acquisition. Starwood Property Trust stock closed at $18.13 on Feb. 7, 2021. There have been highs and lows -- the 52-week range is $7.59-$26.07 -- but like its dividend, the stock price has also been quite consistent.
AGNC Investment Corporation
Based in Bethesda, Maryland, AGNC generates its income through single-family residential mortgage pass-through securities and collateralized mortgage obligations that are guaranteed by U.S. government agencies. It lays claim to being the second-largest internally managed residential mREIT and one of only two residential mREITs with a market cap over $5 billion.
AGNC stock was yielding 8.83% based on its Feb. 5 closing price of $16.30. AGNC also has a history of consistent dividends, paying $0.12 each of the past 10 quarters and $0.16 for 11 straight quarters prior to that, and then $0.18 per quarter from August 2016 to April 2019.
AGNC has traded as high as $19.65 and as low as $6.25 in the volatile past 52 weeks and has traded as high as $36.68. But that was in 2012. Its 52-week average right now is $14.15 and being above that right now depresses the yield percentage a bit, but then, this probably isn’t a growth stock to most investors.
It’s that steady payout that matters, and decisions about this issue might begin with comparing it to more director competitors.
Omega Healthcare Investors
Based in Hunt Valley, Maryland, Omega Healthcare Investors invests in the long-term healthcare industry, using primarily triple net leases in its work with 69 different operators at 957 facilities in 40 states and the United Kingdom.
Omega stock was yielding 7.27% based on its Feb. 5 closing price of $36.85. The company declared a dividend of $0.67 per share for the fourth quarter, continuing a six-quarter string payout of that amount and a history of growing dividends dating to 2013.
The company’s stock is about 20% off its 52-week high of $45.22 but more than 60% above its 52-week low of 13.33% as the pandemic hit nursing homes and their operators particularly hard. Omega also turned a profit in the fourth quarter after going in the red earlier in the year, and it recently announced the acquisition of 24 senior living facilities from Healthpeak Properties (NYSE: PEAK) for $510 million.
The Millionacres bottom line
AGNC, Starwood, and Omega Healthcare have different business models that present their own potential risks going forward. They do share in common some fundamental reasons to believe they are not yield traps and can continue rewarding investors for years to come.