A Big Correction May Be Coming: Goldman Sachs Says Buy High-Dividend REITs Now

imaginima / Getty Images

Since the lows in March of 2020, the stock market has doubled. Think about that for a moment. The S&P 500 closed at 2,237 on March 23 of that year and closed Tuesday at 4,448 just shy of an incredible 100% gain in 17 months. Numerous reasons for this have been cited, including the incredibly loose monetary policy that has been in place for years, but went nuclear when COVID-19 surged in the winter of 2020. Toss in the WallStreetBets crowd, which had government hand-outs to trade with while locked up at home, and you had all the ingredients for the proverbial melt-up.

The truly scary situation for investors is that the market hasn’t had a 5% correction in almost a year, which is very unusual. The difficult question for investors is what to do now? Sell everything and go to cash? That would be a great idea if money markets paid anything. The highest yielding money market savings account pays a lousy 0.40%. Banks literally pay almost zero for funds held in checking accounts.

One idea for those worried about a massive sell-off is to move to safe stocks that pay dividends. While they will not be immune to a big risk-off move, the chances are good they will hold up better than crowded technology or meme stocks. Goldman Sachs is very positive on high-dividend-paying real estate investment trusts (REITs). Five are rated Buy at the firm and make good sense now for investors who are more conservative. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Extra Space Storage

This top REIT is a safe way for investors to own the self-storage sector. Extra Space Storage Inc. (NYSE: EXR) is a fully integrated, self-administered and self-managed REIT headquartered in Salt Lake City, Utah.

Like many self-storage companies, Extra Space offers rentable storage space offering customers conveniently located and secure storage units across the country, including boat storage, recreational vehicle storage and business storage.

As of the fourth quarter of 2020, the company owned or operated 1,971 self-storage stores in 40 states, the District of Columbia and Puerto Rico. The portfolio consists of approximately 149.2 million square feet of rentable space and 1.4 million units, making the company the second-largest owner/operator of self-storage stores and the largest self-storage management company in the country.

Holders of Extra Space Storage stock receive a 2.28% distribution. The Goldman Sachs price target for the units is $213, while the consensus target is just $140.33. The stock closed on Tuesday at $176.38.

Hudson Pacific Properties

With a very solid distribution and solid west coast exposure, this stock works well for those looking to move down the risk ladder now. Hudson Pacific Properties Inc. (NYSE: HPP) has a portfolio of office and studio properties totaling nearly 19 million square feet, including land for development. Focused on premier west coast epicenters of innovation, media and technology, its anchor tenants include Fortune 500 and leading growth companies such as Netflix, Google and Uber.

The REIT signed more than 524,000 square feet of office leases in the first quarter at cash rental rates 2.4% above prior leases. That number was a bit deflated due to some large renewals at market rates and a lease expansion below market rates. After adjusting for those items, cash rent growth was 6.9% on its other leases. As a result of those lease signings, its stabilized portfolio ended the quarter 92.7% leased.

Investors receive a 3.77% distribution. Goldman Sachs has a $35 price target on Hudson Pacific Properties stock, and the consensus target is $28. Tuesday’s closing price was $26.42.

Realty Income

This is an ideal stock for growth and income investors looking for a safer idea for the rest of 2021. Realty Income Corp. (NYSE: O) is an S&P 500 company dedicated to providing stockholders with dependable monthly income.

The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 6,500 real estate properties owned under long-term lease agreements with commercial tenants.

To date, the company has declared 604 consecutive common stock monthly dividends throughout its 51-year operating history and increased the dividend 108 times since its public listing in 1994.

Investors receive a 3.90% distribution. The $86 Goldman Sachs price target compares with the lower $75.17 consensus target. Realty Income stock closed at $72.31 on Tuesday.

Simon Property

Commercial real estate has picked up again in a big way, and Simon Property Group Inc. (NYSE: SPG) is a very strong company for investors looking to play the industry. It invests in real estate markets across the globe. It engages in investment, ownership, management and development of properties. The company primarily invests in regional malls, premium outlets, mills and community/lifestyle centers to create its portfolio.
Through its subsidiary partnership, Simon Property owns or has an interest in about 230 properties in the United States and Asia. The company also has a 28.9% interest in Klepierre, a European REIT with over 260 shopping centers in 13 countries.

One key driver of growth will include the $1.0 billion or more of development/redevelopment planned over the next few years. The company also posted solid results with net income attributable to common stockholders coming in at $617.3 million, or $1.88 per diluted share, as compared to $254.2 million, or $0.83 per diluted share in 2020.

Results for the second quarter of 2021 include a non-cash gain of $118.4 million, or $0.32 per diluted share, because of the reversal of a deferred tax liability associated with an international investment.

Shareholders receive a 4.58% distribution. Goldman Sachs recently raised its $148 price target to $163. The consensus target is $138.71, and Simon Property stock ended trading on Tuesday at $128.1.

SL Green Realty

This is a leading large-cap office REIT that the Goldman Sachs team prefers now, and it is a solid contrarian play. SL Green Realty Corp. (NYSE: SLG), Manhattan’s largest office landlord, is a fully integrated REIT focused primarily on acquiring, managing and maximizing value of Manhattan commercial properties.

As of December 31, 2020, it held interests in 88 buildings totaling 38.2 million square feet. This included ownership interests in 28.6 million square feet of Manhattan buildings and 8.7 million square feet securing debt and preferred equity investments.

During the past year, SL Green Realty grew its earnings by 44%. The share price gain of 56% certainly outpaced the earnings growth. This indicates that the market is now more optimistic about the stock. While the Manhattan market is just coming back to life, and the new vaccine rules may slow the reopening, this is a very solid long-term play.

Investors receive a generous monthly 5.01% dividend. Goldman Sachs has set a $93 price target. The consensus price objective is $77, and SL Green Realty stock closed most recently at $72.91.

These five top companies pay dependable distributions. With the stock market horribly overbought, inflation posting some of the biggest jumps in years and interest rates still at generational lows, moving capital to hard assets now makes a ton of sense. Investors should remember that REIT distributions may contain return of principal. And note that most of these stocks closed either higher or just slightly lower after the Tuesday sell-off.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.