The real estate investment trust (REIT) sector is known for offering investors a high level of dividend yield. That makes sense, since REITs were specifically designed to pass income on to shareholders via dividends.
But if you're looking for the most reliable dividend-paying REITs, you'll want to focus on Federal Realty(NYSE: FRT), Realty Income(NYSE: O), and Essex Property Trust(NYSE: ESS), all of which invest in different types of institutional real estate. Here's a primer on each.
Federal Realty's portfolio is small, but its results are huge
Federal Realty's dividend yield is roughly 3.8%. That's well above the 1.2% that you'd collect from an S&P 500 index fund and about in line with the 3.9% average yield of REITs. But the big story here is that Federal Realty has increased its dividend for a huge 57 consecutive years. That makes this REIT a Dividend King. At this point, it's the only REIT to have achieved this status, which suggests you can own it and sleep soundly.
What's interesting is that Federal Realty takes a different approach to its portfolio than most REITs. Usually, REITs grow by buying more properties. Federal Realty's portfolio only contains around 100 strip malls and mixed-use properties. But they are really good properties located in markets that have high barriers to entry and that are densely packed with higher-income customers. Basically, Federal Realty owns retail assets in locations where retailers want to be. The results speak for themselves, dividend-wise.
Federal Realty's business performance will wax and wane over time, since its business is directly tied to the performance of its tenants (which are affected by the ups and downs of the economy). But if you're looking for landlords that have proven track records of success throughout the economic cycle, Federal Realty is the place to start in the strip mall sector.
Realty Income is No. 2, but also No. 1
NNN REIT is the net lease REIT with the longest streak of annual dividend increases under its belt, at 35 years. A net lease requires tenants to pay for most property-level operating costs. NNN REIT's yield is 4.8%, and it's a perfectly fine "sleep well at night" REIT.
But Realty Income is the 800-pound gorilla of the net lease sector, weighing in at about four times the size of the next largest competitor (which is not NNN REIT, by the way). Realty Income has increased its dividend for 29 years, which is still pretty impressive, and its dividend yield is a slightly higher 5%.
Simply put, if you prefer to own the biggest and best companies in a sector, Realty Income is the REIT to buy even though NNN REIT has a longer dividend streak going. There are a couple of reasons for this. Realty Income's size (it owns a huge 15,400 properties) gives it advantaged access to capital markets and the ability to take on deals that smaller peers couldn't. Realty Income's size also means it has more diversification, but that extends well beyond the number of buildings it owns.
Unlike NNN REIT, which is solely focused on single-tenant retail properties in the U.S., Realty Income owns retail, industrial, and other assets (notably casinos and data centers). Realty Income also has exposure to European markets, where net lease assets are still a fairly new category. That should provide a material runway for future growth. Conservatively managed Realty Income is the name to beat in net lease, and the high-yield REIT could comfortably find a home in all conservative dividend portfolios.
Essex Property Trust is focused on an attractive market
Essex Property Trust is the hardest REIT to buy on this list, because of its business model. But, first, some stats. Essex has increased its dividend annually for three decades. The dividend yield is 3.2%, which is a little low for a REIT but is still high relative to the broader economy. The big selling point there, however, is that the dividend has increased at a compound annual rate of just over 6% over the past decade. That's roughly twice the pace of Federal Realty, NNN REIT, and Realty Income.
Essex Property Trust is, basically, a growth and income stock or a dividend growth stock. That's not a bad thing -- unless your sole focus is on generating the highest amount of income possible from your portfolio. Over time, strong dividend growth can lead to a very attractive yield on purchase price. That's the first hurdle for investors to jump.
Essex Property Trust also owns apartments and is highly focused on technology-driven markets on the West Coast. That last one is the big issue, because Essex Property Trust isn't all that diversified. Apartments are a reliable asset class, given that a home is a necessity, and Essex Property Trust operates in supply-constrained markets with strong demand characteristics.
This approach has clearly worked out well over time. To own it, however, you need to understand that a technology downturn on the West Coast could cause outsize pain to this REIT's business. If history is any guide, though, that hasn't been a big problem given the impressive dividend streak.
Sleep well at night for a decade or more
All the REITs highlighted here have multi-decade dividend streaks, and there's no reason to believe those streaks will end anytime soon. They all offer a slightly different investment angle, from strip malls to apartments. And they all have generous yields, though Essex Property Trust is probably best considered a dividend growth stock.
If you are a dividend investor looking at the paltry yield available from the S&P 500 index, you'll likely find all the REITs here attractive income options today and for years to come.
Should you invest $1,000 in Realty Income right now?
Before you buy stock in Realty Income, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $662,392!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.