With the S&P 500 Index yielding a paltry 1.3% today, an over 5% dividend yield might sound a bit shocking. But there are plenty of real estate investment trusts (REITs) that boast such impressive numbers. The key is for investors to focus on the landlords that have the ability to sustain their high payouts. Here are three that look like buys today, including low-risk W.P. Carey (NYSE: WPC), middle-of-the-road Gaming & Leisure Properties (NASDAQ: GPLI), and higher-risk Omega Healthcare Investors (NYSE: OHI).
1. The 'bottom' of the pack
When it comes to this trio of high-yield REITs, W.P. Carey easily looks like the lowest-risk name. It's good to be last on that list, of course, but there's a lot to unpack here.
First off, W.P. Carey is a net lease REIT. That means that it owns single-tenant properties, but its tenants are responsible for most of the operating costs of the assets they occupy. It is a fairly low-risk approach in the REIT space and basically means management just has to collect rents.
On top of that, W.P. Carey is highly diversified, with assets across the industrial (25% of rent), warehouse (23%), office (21%), retail (18%), and self-storage (5%) sectors ("other" makes up the balance). And roughly 38% of rents are derived from outside the United States, largely from Europe. Diversification is good for your portfolio, and it's good for a REIT's portfolio, too.
Add to this the company's 24-year streak of annual dividend increases (every year since its 1998 IPO) and you can see why this is a REIT even conservative investors could easily love. In fact, after 2021 draws to a close, W.P. Carey should find itself included on the Dividend Aristocrat list (25-plus years of annual hikes). And, despite all of these positives, the dividend yield here is a hefty 5.6% today. If you are looking for a conservative way to boost the income you generate, this is one REIT you'll want to look at right now.
2. Playing around
Gaming & Leisure Properties offers a similarly high dividend yield at 5.6%. And it, too, uses the net lease approach. But this REIT is focused on owning casinos. It has a sizable portfolio, with around 50 properties across 17 states, but it would be hard to call Gaming & Leisure a diversified REIT, given that it serves just one industry.
The key here is that humans simply like to gamble and always have. So while the casino industry is highly cyclical, it always seems to come back strong when the economy picks back up again. Notably, the REIT trimmed its dividend by about 15% in the 2020 pandemic-led recession to preserve liquidity in an uncertain time, but it has already hiked it twice since that point.
Meanwhile, casino-focused REITs are a fairly new thing, with Gaming & Leisure being among the first to come to market. So there's still more room for this investment-grade-rated REIT to expand. And, once the casino market is saturated, the REIT can focus on the "leisure" space to start diversifying its portfolio into more areas (options that quickly come to mind are amusement parks and ski resorts).
So it muddled through the pandemic downturn in relative stride, is coming out strong, and has ample room to expand (and diversify) in the future. That sounds pretty interesting if you are looking for big yields and willing to take on a name that is quickly bouncing back from a recent dividend cut.
3. Still dealing with the hit
The last name up, Omega Healthcare Investors, requires a stronger stomach. However, with an 8.8% dividend yield, investors are getting compensated well for the extra risk.
Here's the lowdown: Omega owns a portfolio of senior housing assets, with a heavy focus on nursing homes. These have been among the hardest-hit properties during the pandemic. At this point, the REIT has three tenants, representing 8.6% of rents, that are having trouble paying. That's not a good sign, though the adjusted funds from operations (FFO) payout ratio of 78% in the second quarter of 2021 suggests there's some room for adversity before a dividend cut is a big worry.
Notably, occupancy levels are picking up at its properties, so the pain of 2020 appears to be ebbing. And, longer term, the demographic tailwinds supporting its business remain in place. So there's a strong reason to believe that Omega's long-term future is still pretty solid despite the near-term headwinds.
The big picture is simple: The 65-plus population will grow materially over the next couple of decades, and this group needs more medical care. Meanwhile, the most cost-effective way to provide material amounts of care to the sickest patients is in a nursing home. In fact, at this point in time, it looks like demand could outstrip supply in the near future.
So if Omega can get through the current headwinds, the future looks very bright. Investors willing to take on that contrarian bet can collect a very fat dividend along the way.
One of these high yields should fit your fancy
W.P. Carey, Gaming & Leisure, and Omega are very different REITs, and it's unlikely that any investor will find all three attractive. However, given that they cover a broad risk spectrum, from low-risk W.P. Carey to high-risk Omega, there's likely to be one that interests you enough to find its way into your portfolio today.