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 neutrally ranked or timely REITs with yields above the current median of 4.49% (see list below).

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 could also present a good buying opportunity if a company is merely misunderstood. The screen turned up several interesting REITs (see list below), including Digital Realty Trust, Inc. (DLR) and HCP Inc. (HCP).

Digital Realty Trust, Inc.

Digital Realty Trust is a real estate investment trust that owns, acquires, develops, and manages technology-related real estate, such as Internet gateway datacenters, corporate datacenters, technology manufacturing properties, as well as regional or national offices of technology companies. As of December 31st, the company’s portfolio consisted of 131 properties (or 24.5 million net rentable square feet), including 12 held as investments in unconsolidated joint ventures and developable land, which are located throughout North America (104 properties), Europe (22), Australia (3), and Asia (2).

The company ended the year on an admirable note, posting record leasing results and higher rental rates. This improvement stemmed, in part, from large cloud requirements in Ashburn (Virginia) as well as Dallas and Richardson (Texas) during the fourth quarter. Over the long term, we expect Digital Realty will further capitalize on large-scale cloud deployments, which represented a hefty 60% of lease signings in 2013, in addition to its colocation offerings. This outlook largely stems from higher usage/demand for cloud infrastructure and applications, data management, and data analytics. In fact, global business spending for closed-based services is expected to increase 20% in 2014, to $174 billion (according to an IHS press release). For example, IBM (IBM - Free IBM Stock Report), Digital Realty’s second-largest customer (accounted for over 5.5% of total revenues), plans to spend $1.2 billion to open 15 new cloud datacenters globally. On a similar note, we anticipate this REIT will continue to expand its portfolio of assets through acquisitions, especially for data center locations.

Digital Realty has the fourth-highest dividend yield for all REITs covered under the Value Line universe. The board of directors recently raised the dividend by 6% to $0.83 a share, equating to an annual rate of $3.32 a share. Notably, the quarterly payout has a compound annual growth rate of 14.3% (since its 2004 IPO). Looking ahead, we expect additional dividend hikes over the 3- to 5-year horizon.

HCP, Inc.

HCP, Inc. invests in real estate, primarily related to the healthcare industry, throughout 46 states. Indeed, the company has roughly $22 billion of assets under management. Its portfolio, which is comprised of 1,079 properties (as of December 31st), is separated into five segments: senior housing (444 properties, 36% of 2013 revenues), post-acute/skilled nursing (302 properties, 29%), life science (111 properties, 14%), medical office (206 properties, 17%), and hospital (16 properties, 4%).

Expanding through acquisitions is a fundamental part to any REITs growth strategy. In fact, HCP invested $598 million in 2013, of which, the most notable was the May purchase of $198 million of UK-based Barchester Healthcare’s debt investments. Despite the company’s past buying behavior, the REIT decided to reduce its investment activity, starting in the back half of 2013. This largely reflected uncertainty surrounding the Federal Reserve’s interest rate policies, the acquisition of the aforementioned Barchester real estate portfolio, and recent management changes. As a result, the company anticipates results will be relatively flat in 2014, with FFO per share pegged to land in the $2.96-$3.02 range, as compared to the $2.98 posted in 2013. Meanwhile, HCP has been active on the disposition front, selling 13 properties for approximately $111 million last year (gain on sale of $68 million).

Nevertheless, the company has already taken steps to increase acquisition activity down the line both in the U.S. and internationally. We expect this activity, coupled with the baby-boomer generation’s move toward retirement, which should drive demand for healthcare facilities, to be the leading growth catalysts over the long term.

The board of directors recently increased the quarterly distribution by 3.8%, to $0.545 a share, or an annualized rate of $2.18 a share. To wit, the company has raised the dividend for 29 consecutive years, making it the only REIT to be included in the S&P 500 Dividend Aristocrats Index. The company’s trend of “improving the payout ratio, while simultaneously increasing the dividend” will likely persist over the 2017-2019 time frame.


Company Ticker Dividend Yield
Annaly Capital Mgmt. NLY 11.06
Geo Group (The) GEO 7.02
Corrections Corp. Amer. CXW 6.46
Digital Realty Trust DLR 6.34
HCP Inc. HCP 5.64
Healthcare R'lty Trust HR 4.98
Penn. R.E.I.T. PEI 4.66
Weingarten Realty WRI 4.28
UDR, Inc. UDR 4.05
Duke Realty Corp. DRE 4.04
Camden Property Trust CPT 3.96
Apartment Investment AIV 3.45
Public Storage PSA 3.36
Prologis PLD 3.28
Host Hotels & Resorts HST 3
Vornado R'lty Trust VNO 2.96
General Growth Prop. GGP 2.55
SL Green Realty SLG 2.01
FelCor Lodging Tr. FCH 1.42

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