Real estate can be a great place to earn dividend income. Many real estate investments, like a real estate investment trust, or REIT, pay their investors a large portion of their cash flow via dividends. However, a publicly traded REIT isn't the only place income investors can earn an attractive dividend yield as several other real-estate-related stocks also offer high dividends.
Here's a look at the types of real estate stocks that can be great options for income investors as well as three top choices to consider buying this month.
What are high-dividend real estate stocks?
There are many ways to invest in real estate. One excellent option for beginners is to buy the stocks of publicly traded companies that operate in the real estate industry. There are many options, including:
- Home improvement retailers.
- Retailers with extensive real estate holdings.
- Real estate development companies.
- Real estate brokerages.
- Large companies that have real estate subsidiaries or real estate investments.
Many companies in these real-estate-related sectors pay out a portion of their earnings to shareholders via dividends. Those dividend payout ratios can vary depending on how much cash flow a company needs to retain to reinvest in the growth of its business. Some companies keep less of their income, enabling them to make a higher dividend payment, pushing their yields above the stock market's average of around 2%. Here's a look at three great real estate-focused companies that pay higher than average dividend yields.
Leading home improvement retailer Home Depot (NYSE: HD) has been a great income stock over the years. The company has paid a dividend for 133 consecutive quarters, increasing the rate for the last 11 years. This year's increase was a generous 10%, which helped push its yield to its currently above-average level of 2.4%.
That payout is on solid ground despite the current economic turmoil due to the COVID-19 outbreak. While Home Depot pulled its 2020 financial guidance due to the ongoing uncertainty, it noted that "sales trends were strong at the end of the first quarter and into the first two weeks of the second quarter," which bodes well for its ability to generate cash to fund the dividend. It also has A-rated credit -- a rarity in the retail sector -- providing further support for the payout.
Industrial REIT Prologis (NYSE: PLD) has also treated income investors well over the years. The logistics real estate owner has grown its dividend at an above-average pace over the last five years (a 10% compound annual rate versus 6% for the average REIT and 9% for the S&P 500), including increasing it by 9.4% for 2020. All these increases have helped boost its current yield to an above-average 2.5%.
Prologis' dividend is on rock-solid ground despite this year's turmoil in the commercial real estate sector. It received an impressive 97.6% of April's rent and 95% of what it billed in May, which is well above the collection rates of most other REITs. Meanwhile, it has a conservative 65% dividend payout ratio and an A-rated balance sheet, providing further support for its payout.
McDonald's (NYSE: MCD) might be a fast food restaurant operator. However, it's much more of a real estate play than most people realize. Overall, it owns 55% of the land beneath its restaurants and 80% of the physical buildings. The company leases this real estate to its franchisees, providing it with a stable income stream to complement franchise fees and corporate sales. In 2019, the company generated $7.5 billion of rental income, which was a third of its corporate revenue.
The company's real estate business helps support its above-average dividend, which currently yields 2.7%. The company has increased its dividend every year since it started paying one in 1976, including giving its investors an 8% raise last September. That payout is on a firm foundation thanks to the company's stable real estate earnings and cash-rich, investment-grade balance sheet.
Great dividend plays from real estate
Home Depot, Prologis, and McDonald's have a long history of giving their investors a raise each year. Those steady increases have helped push their current payouts to above-average levels. Add in their rock-solid financial profiles, and this trio offers investors the opportunity to earn above-average dividend income from the real estate sector.