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There are a few sectors and industries that income 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. Potential investors should note that dividends shareholders receive from a REIT are taxed as ordinary income. 

Just because REITs, in general, have a tendency to pay material dividends, doesn’t mean that all REITs do. Just as with other sectors, some REITs are geared toward growth and others toward income. To highlight those that fall into the latter category, we used the online screening tools of The Value Line Investment Survey to highlight those REITs with the highest current yields.

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, including Health Care REIT (HCN) and Hospitality Properties Trust (HPT).

Health Care REIT

Health Care REIT is comprised of 956 properties throughout 46 states (as of March 31st). The company’s portfolio covers the full spectrum of seniors housing and health care real estate, which is broken down into six segments: seniors housing triple-net (28%), skilled nursing/post-acute facilities (24%), seniors housing operating (20%), hospitals (6%), medical office buildings (20%), and life science buildings (2%). Too, the company offers property management and development services.

Health Care REIT is actively developing its pipeline, which largely consists of select senior living facilities and high-quality medical office properties. In total, the company has spent $1.3 billion on investments in 2012. Additionally, this Ohio-based REIT is entering international markets. To fuel this expansion, management completed a joint-venture project with a Canadian REIT, Chartwell Seniors Housing. Dispositions and common stock issues should help fund these investments.

Health Care REIT has the fourth-highest dividend yield for all REITs under our review. Management  recently announced yet another dividend hike, pushing quarterly payouts to $0.74 per share, which will equate to an annual dividend of $2.96 for 2012. With a yield around 6%, this healthcare REIT is currently outshining competitors such as HCP, Inc. (HCP). Moreover, considering past trends, we expect to see dividend increases in the coming years.

Hospitality Properties Trust

Hospitality Properties Trust is a REIT that invests in upscale hotels and travel center properties, and is managed by Reit Management & Research (RMR). In total, Hospitality Properties owns 290 hotels with 43,515 rooms or suites, and 185 travel centers in 44 states, Canada, and Puerto Rico. The hotel properties are generally operated by distinguished hotel tenants and managers, such as Marriott International (MAR), InterContinental Hotels Group (IHG), and Hyatt Hotels (H), among others, through six operating management and lease agreements. Additionally, TravelCenters of America (TA), under the umbrella of Hospitality Properties, operates 145 travel centers, with the other 45 under Petro Stopping Centers. Too, the company recently acquired two Royal Sonesta hotels, and entered into management agreements with Sonesta International Hotels Corporation.

The management agreements mentioned above have “security features”, which protect Hospitality Properties with minimum returns and rents regardless of hotel performance. Although the REIT industry has fewer headwinds to face due to economic improvement since the recession, challenges for the company have not completely disappeared. This is evident in relation to the restructured agreements with Marriott and InterContinental Hotels, in which payments from these operators fell below the newly agreed minimums during the first quarter. In other news, Hospitality Properties plans on spending approximately $375 million on improvements to Sonesta properties, and the Marriott, InterContinental, and TravelCenters portfolios.

This stock may interest income-oriented investors due to its impressive dividend yield of 7%; it is ranked second on our list, only under Annaly Capital Management (NLY). Hospitality Properties has maintained its annual dividend of $1.80 per share for the past two years, and we anticipate no changes in 2012 and 2013. However, we do expect increases in the coming 3 to 5 years. Moreover, the dividend is well-covered and should continue to strengthen. However, investors should note Hospitality Properties’ high Beta, indicating a volatile share price.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.