Income Investing: 5 Top REITs Paying Up to 11.6%
September 13, 2019
Collect Reliable Rental Income From These Five Top REITs
Have you ever considered buying a rental property? You’re not alone. Many people have thought about buying investment real estate until they consider the hassle of dealing with tenants: shoveling driveways, chasing down rent checks, and unclogging toilets at two in the morning.
But it’s hard to shake the idea of owning your own real estate empire. Few other investments offer the potential to generate regular income and robust capital gains. It’s just that few of us dream of spending our “golden years” dealing with deadbeat renters.
One solution: real estate investment trusts (REITs). These partnerships buy properties, collect the income from tenants, and pass on the profits to unitholders. And because many trades on public stock exchanges, you can buy and sell them with the click of a mouse.
For income investors, this can create a perfect stream of passive income. I keep a large percentage of my own net worth in these businesses, which provides a nice supplement to my salary. And some of these securities pay distribution yields of 10%, 12%, or even 15%.
To help get you started, I’ve compiled a list of five top REITs. To be clear, it doesn’t constitute a list of “buy” recommendations. Some of these names look expensive and aren’t necessarily a good place to put money to work right now. It does, however, serve as a great jumping-off point for further research.
|
Company |
Market Cap |
Yield |
|---|---|---|
|
American Tower Corp |
$95.1 Billion |
1.7% |
|
Crown Castle International Corp. |
$57.3 Billion |
3.2% |
|
Public Storage |
$43.6 Billion |
3.2% |
|
Welltower Inc |
$35.5 Billion |
4.0% |
|
Annaly Capital Management |
$12.6 Billion |
11.6% |
(Source: Yahoo! Finance, last accessed September 12, 2019.)
Let’s dig into the details.
American Tower Corp and Crown Castle International
American Tower Corp (NYSE:AMT) and Crown Castle International Corp. (NYSE:CCI) serve as the landlords of the telecom industry. These partnerships own thousands of cell phone towers across the country, which carriers use to house their broadcasting equipment.
In exchange, the carriers have to cough up ongoing rent payments. When leased out to a single tenant, each tower generates a return of about four percent annually. But because the costs of running a broadcasting site are mostly fixed, profits soar when landlords sign up additional tenants. Properties with three renters can earn annual returns upwards of 24% per year. (Source: “Introduction to the Tower Industry & American Tower,” American Tower Corp, June 30, 2019.)
And the profits from these properties could soon soar. Over the next few years, telecom carriers plan to roll out the next wave of wireless technology. The new network, dubbed 5G, promises to boost mobile browsing speeds 100-fold.
To bring this system online, carriers will need new broadcasting sites nationwide. That has started to push up lease rates at tower locations already in place. For landlords like American Tower and Crown Castle, this trend will likely mean large, ongoing dividend hikes in the decade ahead.
Public Storage
There’s a simple story at Public Storage (NYSE:PSA): it’s a well-run self-storage company with more 2,200 locations worldwide. (Source: “Welcome to Public Storage Canada,” Public Storage, last accessed September 11, 2019.)
These lockers, where people keep their extra junk, don’t make for the best water cooler conversation, but tenants, by and large, pay their rent on time. And because moving locations presents a big hassle for tenants, they don’t mind paying more rent for space each year. As a result, Public Storage pays a dependable 3.2% dividend—a dividend, by the way, that has rolled in like clockwork for decades.
Plain. Predictable. Profitable. If the economy stalls or the stock market crashes, top REITs like Public Storage will provide some of the best returns around.
Welltower
Welltower Inc (NYSE:WELL) finds itself smack dab in one of the biggest investment booms in history. Each day, 10,000 baby boomers turn 65 nationwide. By 2040, one in five Americans will be older than 65. (Source: “By 2040, One in Five Americans Will Be Over Age 65,” AARP, May 7, 2018.)
This trend has created a growing demand for retirement communities, medical buildings, and senior living centers.
As one of the largest landlords of such properties, Welltower has posted robust cash flow growth over the past few years. Management passes on most of this income to investors, pushing up the yield on its shares to four percent. Yet with demand for space only poised to grow, these payments could surge in the years ahead.
Annaly Capital Management
Annaly Capital Management, Inc. (NYSE:NLY) is a unique business in this list of top REITs. Rather than buying properties itself, management invests most of the company’s capital on mortgages. Analysts prize these deals because they pay regular interest income and often come with a guarantee from the U.S. government.
Annaly executives juice their returns further by employing a modest amount of leverage. For shareholders, this has created a lucrative business. Since Annaly went public in late 1997, its shares have delivered a total return of 450%. Today, the trust pays a quarterly distribution of $0.25 apiece, which comes out to an annual yield of 11.6%.
To be clear, this above-average yield comes with above-average risk. Annaly’s profit margin fluctuates based on the difference between mortgage yields and the cost to borrow funds. And this spread can swing wildly from year to year. But for investors who understand the risks up front, this can make for a nice income supplement inside a well-balanced portfolio.
