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
W.P. Carey (NYSE: WPC), National Health Investors (NYSE: NHI) and Sabra Healthcare (NASDAQ: SBRA) are still paying high dividends, and they have the strong revenue and balance sheets needed to keep those dividends coming.
W.P. Carey: a resilient REIT
W.P. Carey is a diversified REIT with an impressive tenant mix. They maintain such a well-diversified portfolio that they're never overly exposed to a collapse in any industry. They have also been smart in their repositioning. Their portfolio is currently heavier on industrial and warehouse properties and lighter in retail. This should keep them in a strong position as the demand for industrial and warehouse space is continuing to grow at a steady pace.
Occupancy has remained strong at 98.9%, and their weighted average lease term is sitting at a very impressive 10.7 years. Only about 46% of their annual base rent is in leases that are expiring before 2030. Considering this secure position, their revenue should be pretty safe for at least the next 10 years.
W.P. Carey has increased their dividends every year since going public in 1998, and there doesn't appear to be any reason for that to change. Their payout ratio is on the higher end, at 85.2%, but they have had no problem maintaining a payout ratio between 80% and 90% for the past several years.
Their management team has done an excellent job of managing their debt and ensuring they always have access to plenty of liquid capital when needed. Even with $2.2 billion in investments since 2018, they still have a debt-to-EBITDA ratio of just 5.46.
W.P. Carey hasn't historically been a high-yield REIT. They're still priced at a discount, so it's a great time to lock in that yield with a solid REIT and enjoy the annual dividend raises.
Sabra Health Care: the value REIT that's making a comeback
Sabra was hit hard early on in the COVID-19 pandemic, along with many other healthcare REITs. Sabra Health Care was one of the hardest-hit REITs from the pandemic, but their management did an excellent job making quick decisions to protect the residents and employees in their facilities as well as the long-term health of the REIT.
Difficult decisions had to be made for long-term benefit that caused some short-term financial pain. Most of their facilities stopped doing tours and intakes in an effort to protect the current residents and staff. This created a drop in occupancy but mitigated further impact within the properties.
Ahead of the pandemic, Sabra had been putting a lot of focus on strengthening its portfolio with properties better positioned for future growth and disposing of properties that no longer provide the same growth opportunities. While their acquisitions were temporarily put on hold due to the pandemic, they have resumed their investment activity with three facilities purchased so far in 2020.
Sabra's management team has demonstrated their ability to manage a crisis as bad as this while protecting their balance sheet, revenue, and investors' interest. Rental revenue is very consistent with this time last year, and they haven't added any debt to their balance sheet.
Even with their dividends being cut earlier this year from 0.45 quarterly to 0.30, they still have an impressive yield of 8% with their shares still trading at a discount. While nobody likes seeing dividends cut, it was the right move at the time to protect future payouts. As the recovery continues, I would expect to see the dividend rate return to its previous levels. That would make this a very high-yield REIT with a conservative payout ratio, which is currently at 70%.
National Health Investors: What pandemic?
National Health Investors is another healthcare REIT that's invested heavily in skilled nursing facilities. The thing that makes them different from most other healthcare REITs is that they have triple net leases with most of their operators. This has left them pretty well unscathed through the pandemic.
The difference with the triple net lease model is that they're collecting a flat lease rate and the tenants are covering property expenses. So regardless of what the occupancy level is at a facility they own, the operator is paying the same rent as last month. This might not matter much with smaller operators that may be unable to pay their rent, but NHI leases to some of the largest operators in the country.
You may not see any evidence of a global health and economic crisis looking at National Health Investors' financial statements. Rental revenue and FFO have continued on their steady climb, dividend rates haven't been cut, and the payout ratio hasn't gone up. The balance sheet has also remained pretty consistent. The debt-to-EBITDA ratio of 4.8x is the same as it was at the end of the second quarter of 2019.
This REIT has increased its dividends by 0.20 per share each of the past five years. With the price it's selling at right now, it's a great time to secure some high-yielding dividend income.
The bottom line
High-yield REITs typically involve more risk than REITs with more conservative dividends. However, some REITs that weren't considered high dividend before are providing higher yields. Not because they increased their dividend rate, but because the price came down. If you want to take advantage of the high-yield opportunities right now, these three high-yield REITs look pretty safe.