Investors have taken a deep breath since interest rates are no longer rising with a runaway Federal Reserve rate hiking regime. And after a late 2018 sell-off that spooked the investing community, the stock market has risen handily with a major recovery so far in 2019. This has provided a perfect backdrop for investors who want to own safe dividend themes without much expected dividend and interest rate risk. That has allowed the real estate investment trusts (REITs) to flourish.
Investors love dividends, and those dividends can account for nearly half of total returns over time. Investors are attracted to REITs because of what is expected to be stable income and revenue streams ahead, which also translates into stable to higher dividend payouts over time.
REITs as a group currently have an average yield that is close to 4%, more than 150 basis points higher than the 10-year Treasury’s 2.50% yield.
REITs are now handily represented in the S&P 500 Index. According to the NAREIT industry association, the value of REITs in America was most recently at roughly $1.1 trillion. NAREIT also represents that over 80 million Americans own REITs through mutual fund holdings or exchange traded funds.
REITs also have enjoyed a solid 2019, with the S&P United States REIT Index up about 15% so far in 2019, plus the higher income compared with Treasuries and from equities. One problem that REIT investors are starting to run into is that many REITs have share prices right at or above their consensus analyst price targets, and that may have some investors thinking that the shares have by and large run up too fast.
In an effort to find more stable REITs for investors, 24/7 Wall St. has screened the larger ones by market cap, generally above $2 billion, to avoid any of the smaller or riskier names that might not be as well known. We have focused on REITs that have a dividend yield that is handily above the 10-Year Treasury yield of about 2.5% and that also still have upside in the shares to the Refinitiv consensus price target.
As a reminder, REITs are required per their structuring to distribute at least 90% of their taxable income to shareholders each year. That translates to billions upon billions of dollars in investment income that REIT investors can earn, not even considering the potential for strong capital gains.
In alphabetical order, here are seven REITs handily outyielding the 10-year Treasury that have solid businesses and implied upside to their price targets on average.
Annaly: Mortgage/MBS REIT
Annaly Capital Management Inc. (NYSE: NYSE: NLY) is one of the top mortgage-REITs, with a seasoned management team and a portfolio management team when it comes to knowing which mortgage-backed securities (MBS) it should own. It has been public since the 1990s, so it has a longer history than many of the other MBS REITs. Mortgage REITs are considered to be hybrids of financial managers and REITs because they tend to own mortgages, and securities pools and tranches of mortgages, rather than owning and operating properties themselves. Mortgage REITs also generally are considered to be the highest classification of yields of all REIT sectors.
Annaly has a market value of better than $14.5 billion. The $1.20 annualized dividend payout generates a yield of close to 11.9%. Trading at $10.11, it has a 52-week range is $9.57 to $10.78 and a consensus target price of $10.50. Annaly has maintained its $0.30 per share quarterly dividend for roughly six years, but the payout used to be even higher.
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