Real estate investment trusts are excellent investment vehicles for investors looking to generate current portfolio income. They offer a number of benefits, including cash flow secured by long-term real estate assets, tax-efficient corporate structures and above-average distribution yields.
This is in large part because of the legal implications of operating as a real estate investment trust. REITs are required by law to pay out more than 90% of their net income as distributions to shareholders. Naturally, this results in elevated dividend yields.
Below we highlight five real estate investment trusts with yields above 5%.
Omega Healthcare Investors (OHI)
Omega Healthcare Investors is the largest publicly traded REIT in the United States dedicated to owning and operating skilled-nursing facilities. The trust's portfolio is comprised of approximately 85% skilled-nursing facilities, with the remainder dedicated to senior-housing facilities.
Omega Healthcare Investors' portfolio is diverse. The trust owns approximately 1,000 properties in 42 U.S. states and the United Kingdom, which are leased to 77 independent operators.
Omega Healthcare Investors offers a compelling mixture of yield and safety for income-oriented investors. More specifically, the trust trades with an 8.6% distribution yield that's currently well-covered by underlying cash flows. Omega Healthcare Investors reported a distribution coverage ratio of 1.18 in the most recent quarter, equivalent to a cash-flow payout ratio of approximately 85%.
Welltower is a real estate investment trust that operates three business units: Triple-Net, Senior Housing Operations and Outpatient Medical. The trust controls assets that provide services, including post-acute medical care, assisted-living facilities, care homes, senior-housing communities and outpatient medical buildings. Welltower was founded in 1970, is headquartered in Toledo, Ohio, and trades with a market capitalization of $21.6 billion.
Welltower should not be seen as a rapidly growing real estate investment trust. Instead, the company should be seen as a stable and conservative source of portfolio income. The REIT's funds from operations per share (FFO per share) have grown at a rate of 3.8% per year over the last decade.
Welltower currently trades with a 6% dividend yield and generates more than enough cash flow to fund this distribution on a quarterly basis. As an example, let's consider the trust's 2018 financial guidance. Welltower is expecting to generate funds from operations of between $3.95 and $4.05 per share, which implies a 1.15 distribution-coverage ratio at Welltower's current quarterly dividend rate. This is equivalent to a cash flow payout ratio of 87%. Accordingly, we believe that Welltower's dividend is very safe for the foreseeable future despite its exceptionally high yield.
Senior Housing Properties Trust (SNH)
Senior Housing Properties Trust is a real estate investment trust that owns senior- living communities, medical offices, life-science properties and wellness centers throughout the United States. The trust's portfolio contains more than 430 properties, including approximately 300 senior-living locations. Senior Housing trades with a market capitalization of $4.2 billion.
Senior Housing stands out because of the trust's property-selection criteria. It focuses specifically on private-pay properties with higher margins and stronger growth potential -- an important factor, as that reduces government-funding exposure. Approximately 97% of Senior Housing's net operating income is derived from private- pay sources.
At the security level, Senior Housing's most notable characteristic is its sky-high dividend yield of 8.9%. Importantly, the trust's fundamental performance supports this distribution payment. The most recent quarter saw Senior Housing generate $0.46 per share of funds from operations while paying a quarterly distribution of $0.39 a share. That equates to an 85% cash-flow payout ratio.
Kimco Realty (KIM)
Kimco Realty is a real estate investment trust that specializes in the ownership, management and operation of shopping centers. The trust was founded in 1973 and is headquartered in New Hyde Park, N.Y., and trades with a $7 billion market capitalization.
As a REIT focused on shopping centers, the obvious question regarding Kimco Realty is how it will respond to the rise of online retail. Fortunately, the trust's recent performance suggests that it should be able to continue growing despite this disruptive trend. Kimco's funds from operations per share grew by 4.2% annually between 2010 and 2017.
Yes, the rise of online shopping has introduced some uncertainty to Kimco's investment thesis. However, we believe the trust continues to look attractive. Over the long term, Kimco shareholders should be well-rewarded if the trust can simply maintain its current level of business operations.
This is due to the trust's remarkably high distribution yield. Kimco trades with a 6.8% dividend yield.
Moreover, the trust operates with a prudent payout ratio. Kimco is guiding for adjusted funds from operations between $1.42 and $1.46 per share for fiscal 2018. Combined with this financial guidance, the trust's current dividend payment implies a 78% cash-flow payout ratio, leaving a large margin of error for dividend safety in the event performance deteriorates.
W.P. Carey (WPC)
W.P. Carey is a real estate investment trust that operates two distinct business segments: real estate ownership and investment management. The real estate ownership unit generates 80% of funds from operations, while the investment-management side contributes the remainder. The trust was founded 45 years ago and is headquartered in New York City. W.P. Carey trades with a $7 billion market capitalization.
Among real estate investment trusts, W.P. Carey has stood out as one of the faster- growing businesses in its peer group. The trust has compounded its funds from operations per unit at a 6.2% rate annually over the past decade. This growth has largely been generated by investments in new properties. W.P. Carey has invested $9.7 billion (more than its current market capitalization) into new properties since 2012.
From an income perspective, W.P. Carey also has plenty of appeal. The trust currently trades with a 6.1% dividend yield. Moreover, its distribution is very safe. The company's current financial guidance combined with its current dividend payment imply a 75% cash-flow payout ratio.
The Bottom Line
These five REITs all share two characteristics. First, they offer very high yields for today's investors. And second, each of these yields is currently supported by the organic cash flow generated from the underlying business.
This second characteristic is highly important for high-yield investors. By investing in securities with high yields and sub-90% payout ratios, you minimize the probability of a future dividend cut. For this reason, we believe the securities discussed in this article are good candidates for conservative, income-oriented investors.
-- By Nick McCullum
McCullum is president at Sure Dividend LLC. You can find the full list of high-yield MLPs compiled by Sure Dividend here.
(This article was sent June 12 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Robert Powell, Peter Tchir, Jonathan Heller and others.)