A real estate investment trust, or REIT, can be a great option for those seeking high-dividend stocks since they often offer dividend investors an above-average yield. Unfortunately, not all REITs can sustain their payouts during the real estate sector's inevitable downturns. Because of that, an income investor must carefully consider the safety of the REIT's dividend income before buying it for the yield.
Here's a look at what puts a REIT dividend on solid ground and three high-yield REITs that look safe these days.
What makes a high-yield REIT safe?
Several factors contribute to dividend safety. These include:
- A low dividend-payout ratio. REITs must distribute at least 90% of their taxable income to remain compliant with IRS regulations. However, many pay out more than 100% of their net income because that number is usually less than their actual earnings -- as measured by metrics like funds from operations (FFO) -- because of the impact of depreciation. Still, a REIT must have a conservative payout ratio to ensure the safety of its dividend, ideally paying out less than 80% of its FFO.
- An investment-grade balance sheet. REITs need to borrow money to fund acquisitions and development projects. That's easier to do at a low interest rate if they have an investment-grade balance sheet backed by a low leverage ratio.
- Positive rental collection trends. REITs rely on rental income to support their dividend payment. Because of that, they need to own properties in high demand by creditworthy tenants to ensure they continue to collect enough rent to sustain their dividends.
REIT stocks that have all these traits are less likely to deliver a dividend cut during tough times. Instead, they should have the financial flexibility to provide consistent dividend growth.
REITs with safe high yields
REIT dividends have been dropping like flies this year. Several slashed their payouts while many others suspended them entirely because of the impact COVID-19 has had on their rental income. That's causing investors to grow increasingly concerned about the remaining payouts, which has put pressure on REIT stock prices, pushing their dividend yields higher.
However, not all these REIT dividends are at risk, as several should survive this downturn. Three high-yielding payouts that appear sustainable are those from American Campus Communities (NYSE: ACC), Brandywine Realty Trust (NYSE: BDN), and STORE Capital (NYSE: STOR).
School will soon be back in session
Shares of American Campus Communities, a residential REIT focused on operating student housing properties, have tumbled more than 30% this year, pushing its dividend yield to 5.8%. That payout appears to be safe even though COVID-19 forced most colleges to shift to online learning this spring to help slow the spread. Overall, American Campus Communities' residents made 94.8% of their April payments and 93.3% of what they owed in May.
Meanwhile, despite recent headlines that schools like Harvard planned to have all their students learn remotely this fall, most others plan to have in-person learning environments. In markets where American Campus operates, 69% of the schools have already announced plans to bring back students, with those schools representing 78% of the company's beds. Because of that, preleasing has been strong at 83.1%, roughly in line with last year's rate.
On top of those positive trends, American Campus has a solid investment-grade balance sheet, conservative dividend payout ratio, and lots of liquidity. Because of that, its payout appears likely to survive COVID-19.
Work from home won't wreck this office REIT
Shares of office REIT Brandywine Realty Trust have slumped roughly 30% this year, driving its dividend yield to 7.5%. One factor weighing on the REIT's valuation is concerns that the COVID-19 outbreak will accelerate the trend of companies allowing their employees to work from home permanently. While some companies have made announcements to that effect, most still value having employees come into the office. Likewise, the vast majority of U.S. office workers prefer that versus working from home.
Because of that, almost all Brandywine's tenants kept paying rent on their office space -- collections were 99% in April and 98% for May -- even though many were unoccupied. Meanwhile, the company has continued signing renewal and new leases this year, with most coming at much higher rates than prior contracts on the existing space.
Those factors give the company increasing confidence in its FFO guidance, which puts it on track to generate enough cash to cover its dividend with ample room to spare. Add in its liquidity and solid balance sheet, and Brandywine's big-time payout looks safe.
This retail dividend should survive the apocalypse
Shares of net-lease focused REIT STORE Capital have plunged about 35% this year, boosting its yield to 6.3%. One of the issues weighing on the company is the impact COVID-19 is having on its tenants' ability to pay rent. The company, which focuses mainly on owning retail properties, only collected 68% of April's rent, 70% of what it billed in May, and 76% of June's billings.
While those lower collection rates will put some downward pressure on its cash flow, it has lots of cushion. That's because it has a conservative dividend payout ratio, which usually averages around 70% of its FFO. On top of that, it has an investment-grade balance sheet backed by a low leverage ratio.
Meanwhile, most of its leases are with investment-grade tenants on some of their most profitable locations, which bodes well for STORE's ability to collect past due rent once market conditions improve. These factors suggest that this retail-focused REIT's dividend might be one of the few that survive the sector's current apocalyptic conditions.
Not all high-yield REIT dividends are at risk
While 2020 has been a challenging year for REIT dividends, not all of them will fall victim to COVID-19. Several REITs, including American Campus Communities, Brandywine Realty, and STORE Capital, have the financial flexibility to maintain their above-average payouts despite the impact the outbreak has had on rent collection. Because of that, their payouts seem to be safe despite the current storm in the REIT market.