Income investors were traditionally drawn to dividends, a portion of a public company’s profit distributed to stockholders. Real estate investment trusts (REITs) were particularly attractive, as they were required by tax law to distribute most of their profits as dividends.
However, with risk-free Treasuries offering coupons of 4% to 5%, one might question the need to scramble for dividends. We sought the expertise of Steve Sakwa, a seasoned REIT analyst at Evercore ISI, to shed light on this matter.
“When Treasury yields were at practically zero, investors had no choice but to seek income from utilities or REITs,” Sakwa shared. “Now, the fixed-income market presents a viable alternative.”
Over the past couple of years, commercial real estate has faced setbacks, leading to declining prices for REIT stocks. Consequently, the annual dividend yields of some REITs reached double digits. However, more recently, these yields have settled at an average of 4.1%, not too dissimilar from Treasuries.
According to Sakwa, the Federal Reserve’s future interest rate cuts will provide a welcome boost for REITs and the real estate industry as a whole.
For investors with a long-term perspective, Sakwa believes it still makes sense to hold REITs that boast solid balance sheets within thriving real estate sectors. A successful REIT is expected to grow its profits over time, potentially resulting in appreciation of its shares. “You’re not buying it solely for the yield,” he emphasizes.
While certain segments of commercial real estate face challenges, such as vacant urban offices and declining mall traffic, Sakwa assures us that privately held operators bear the brunt of these issues, rather than publicly traded REITs. Unlike private owners, who may take on excessive leverage, public REITs are discouraged by the stock market from adopting such practices.
In summary, income investing has witnessed a shift in recent years. Treasuries now offer competitive coupon rates, posing a viable alternative to seeking dividends. Nevertheless, owning REITs with stable financial foundations and exposure to thriving real estate sectors can still deliver long-term gains. The upcoming interest rate cuts by the Federal Reserve are also expected to provide a favorable environment for REITs and the larger real estate industry.
Residential Real Estate
Residential real estate has shown more stability compared to other sectors in the property market. As a result, two apartment REITs, Equity Residential (ticker: EQR) and AvalonBay Communities (AVB), are expected to provide reliable dividend streams.
- Annual dividend forecast: $2.65 per share
- Current stock price: $65
- Yield: 4%
- Expected payout: $6.76 per share
- Current stock price: $185
- Yield: 3.6%
Both Equity Residential and AvalonBay Communities have a history of increasing their dividend payouts. AvalonBay’s dividends have grown at an annual rate of 5% while Equity Residential’s have grown at around 2.6%.
Kimco Realty (KIM), a reputable operator of suburban shopping centers, is favored in the retail sector.
- Annual payout: 81 cents per share
- Current stock price: $20
- Yield: 4%
Another favorite in this space is Simon Property Group (SPG), a mall operator with a strong balance sheet.
- Dividend growth rate: 5% per year
- Current annual dividend: $7.70
- Yield: 6.5%
The confidence in Simon Property Group’s malls is evident through regular dividend increases.
Office Real Estate
BXP (formerly known as Boston Properties) is well-regarded for its collection of premier office buildings.
- Dividend growth rate: Less than 2% per year
- Current annual dividend: $3.92
- Yield: Near 6%
Despite limited dividend growth, BXP’s cash flow comfortably covers its payouts, making it an appealing option.
Net-Lease Properties in the Gambling Industry
VICI Properties (VICI) owns net-lease properties in the gambling industry, including popular Las Vegas Strip casinos such as Caesars Palace, the MGM Grand, and the Venetian Resort.
- Dividend growth rate: 5.5% per year
- Current stock price: $31
- Yield: 5.4%
VICI Properties remained resilient during the Covid pandemic and collected rent throughout the shutdowns, showcasing its ability to weather challenging economic conditions.
In conclusion, these REITs offer attractive opportunities for investors seeking stable dividend income.