There are a few sectors and industries that income-oriented investors can turn to, virtually without fail, to find above-average dividend yields. Real estate investment trusts, commonly referred to as REITs, are one such industry (others include utilities and limited partnerships).
The high dividend payouts in the REIT sector relate to two aspects of these securities. First, REITs, as their name implies, own real estate or real-estate related securities (in the case of mortgage REITs). This asset type is known for its cash flow generation. Second, REITs are structured as pass through entities for tax purposes. This allows these companies to avoid corporate taxation, but requires that the vast majority of earnings be “passed” on to shareholders as dividends. Note that shareholders must pay taxes on the dividends they receive from a REIT as if it were income.
Just because REITs, in general, have a tendency to pay material dividends, doesn’t mean that all REITs have high disbursements. Just as with other sectors, some REITs are geared toward growth and others toward income. To highlight those that are geared toward the latter, we used the online screening tools of The Value Line Investment Survey to highlight those REITs with the highest current yields.
This list is a good starting point for investors seeking income, but it is important to keep in mind that an above-average yield can be an indication that the market believes the dividend payment is at risk. That said, a high yield can also present a good buying opportunity if a company is merely misunderstood. The screen turned up several interesting REITs with relatively high yields, including Weingarten Realty Investors (WRI) and HCP Inc. (HCP).
Weingarten Realty Investors
Weingarten Realty is a real estate investment trust (REIT) involved in the acquisition, construction, development, and ownership of shopping centers and other commercial real estate. The company’s primary business is leasing space to tenants in the shopping and industrial properties that it owns. As of the end of 2011, this REIT owned or operated under long-term leases, a total of 380 developed properties as well as 11 properties under various stages of construction and development. These include 313 community shopping centers, 75 industrial projects, and three other operating properties located in 23 states across the United States. In aggregate, the portfolio consists of approximately 76 million square-feet.
Weingarten has been focused on revamping its portfolio lately. The company has been working on a strategic initiative to dispose of $600 million of non-core operating properties over the next several years. It hopes to recycle the proceeds from these sales into new growth opportunities, and to strengthen operating fundamentals. To date, WRI has disposed of $155 million in assets, and has contracts or letters of intent for an additional $77 million.
The company recently announced a 5.5% hike in its dividend. The payout, now at $0.29 per quarter, or $1.16 on an annualized basis, is yielding 4.6%. This remains below the stock’s long term average as a run-up in the issue’s quotation of 13% since our January review has pushed down the yield somewhat. Nevertheless, this is an improvement over recent quarters, and represents the highest payout since the first quarter of 2009, when the distribution was cut in half. We think with its solid fundamentals, Weingarten could boost the yield materially by mid-decade.
HCP is the largest healthcare real estate investment trust in the United States. The company acquires, develops, leases, and manages healthcare real estate, and also provides financing to healthcare providers. It breaks down its portfolio into five segments: Senior Housing (33% of 2011 revenue), Life Science (18%), Medical Office (20%), Post-Acute/Skilled Nursing (25%), and Hospital (5%). HCP maintains a varied portfolio of healthcare investments diversified by segment, geography, operator, tenant, and investment products. This high degree of diversification reduces the likelihood that a single event would cause the company any material harm.
HCP’s markets should remain strong, as compelling demographics increasingly drive demand for healthcare services. Indeed, national health expenditures are projected to grow 4% this year, and produce an average compounded annual growth rate of 6% through 2020, as a greater proportion of Americans reach retirement age. On point, HCP has announced a $100 million senior housing development pipeline by funding development loans on five projects of mainly 75-100 units each. We think this should help improve the quality of the portfolio, especially if coupled with older-asset dispositions. The company looks well-positioned for additional consolidation in senior housing, and should outperform in the life sciences and medical office segments, as well.
Management recently announced a 4% increase in its quarterly dividend, pushing it up to $0.50, or $2.00 on an annualized basis. HCP has rewarded shareholders with consistent payout boosts, a trend that we think is likely to continue. At the current quotation of $39.61 a share, the yield currently rests at 5%, a nice premium over its REIT peers. In addition, we think HCP has the ability to generate solid earnings growth due to its size and scale.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.