With interest rates at such a persistently low level, finding yield is extremely difficult. Investors looking for income should take a look at the real estate investment trust (REIT) market for stocks that pay above-average dividends. REITs are required by law to pay out 90% of their earnings as dividends, which pretty much means big yields. Here are three REITs with yields over 5% that an income investor should consider.
New Residential has numerous business lines that will perform in all environments
New Residential (NYSE: NRZ) is a mortgage REIT that invests primarily in mortgage-backed securities, which are guaranteed by the U.S. government. The company also owns mortgage servicing rights and is a top-tier nonbank mortgage originator. This gives New Rez a diversified portfolio of operations that should perform well in all interest rate environments.
New Residential’s core portfolio consists of agency mortgage-backed securities, which are guaranteed by the U.S. government. The company also owns mortgage servicing rights, which are an unusual financial asset. The mortgage servicer collects mortgage payments, sends them to the ultimate investor, ensures property taxes and escrows are paid, and handles delinquencies. The servicer gets a fee of 0.25% per year as compensation for performing these services. Mortgage servicing is one of the few assets that increases in value as interest rates rise, which makes it an attractive asset in this environment.
Finally, New Rez has been building its mortgage origination arm and recently completed its acquisition of Caliber, which puts New Rez in the top tier of mortgage originators. At current levels, New Residential is trading with a dividend yield of 9.2%.
Employees will be heading back to the office
SL Green (NYSE: SLG) is a REIT in an out-of-favor sector: office space. SL Green is the largest office landlord in Manhattan. The COVID-19 pandemic has caused investors to question the office REIT business model, given that work-from-home has proven effective. New York City office space is extremely expensive, and the fear is that firms will relocate for cheaper, lower-taxed areas.
SL Green’s tenant base is 33% tech, media, and advertising, 30% financial services, and 11% legal services. On its earnings conference call, the company stated that the majority of its tenants were expected to return this fall and new leasing activity has been continuing. While the delta variant of COVID-19 may have pushed some returns back, the overall trend is to head back to the office.
SL Green’s Manhattan-based portfolio has an additional benefit: While it's easy for commuters to get from the suburbs to Manhattan, it is not so easy to go from one suburb to the other. Any move to cheaper suburban real estate will alienate a good percentage of a company’s employees.
The company has been through the worst of the COVID-19 pandemic, and the company is seeing year-over-year decreases in funds from operations as the company had less bargaining power during the pandemic. These effects should largely be over. SL Green pays a monthly dividend of $0.303, which works out to be a 5% dividend yield.
Redwood Trust doesn’t need to fear the Fed
Redwood Trust (NYSE: RWT) is another mortgage REIT; however, it doesn’t have the same exposure as most agency REITs. Redwood Trust invests primarily in mortgage-backed securities, which are not guaranteed by the U.S. Government. Redwood’s portfolio is made up of mortgages that are too large to qualify for a government guarantee (jumbo mortgages). It also invests in business-purpose real estate loans for professional developers.
These loans have one big advantage over government-guaranteed loans: They are less interest-rate sensitive. This means that as the Fed raises rates and pulls back on its purchases of mortgage-backed securities, these loans will suffer much less. Since Redwood is taking credit risk, it benefits from home price appreciation, which has been growing at a 19% clip, according to the FHFA House Price Index.
This means that even if the borrower defaults on the loan, Redwood will get its money back after foreclosure because the property will be worth much more than the loan. Redwood just bumped up its quarterly dividend to $0.21, which gives the company a dividend yield of 6.4%.