Real estate investment trusts, or REITs, are generally a great place to turn for safe and attractive dividend income. This is because they benefit from zero corporate taxation and are required by law to pay out at least 90% of taxable income as dividends to their shareholders. Furthermore, the vast majority of REITs benefit from the defensive and stable nature of real estate contractual rental income.
As a result, it is not surprising that many blue-chip REITs that have been around for decades have now joined the ranks of the world's most elite dividend growth companies as Dividend Aristocrats (25+ consecutive years of dividend growth) and/or Dividend Kings (50+ consecutive years of dividend growth).
Here, we will look at three high-yield REITs that offer safe dividends and are either a Dividend King or a Dividend Aristocrat.
A Young Aristocrat in 'Move In' Condition
Essex Property Trust (ESS) joined the Dividend Aristocrats club fairly recently as it has grown its dividend for 28 consecutive years. Given its very attractive long-term growth prospects, stellar balance sheet, and conservative payout ratio, we expect it to continue growing its dividend for many years to come.
Its business model consists primarily of developing, redeveloping, managing, acquiring, and selling multifamily residential apartment communities on the West Coast. It currently owns over 60,000 apartment units spread across hundreds of communities.
It enjoys three main alpha-generating competitive advantages from this business model.
First, it can develop multifamily properties and then sell them at significant profits. Second, it can leverage its expertise and business network to purchase properties and then engage in value-accretive redevelopment activities which yield very attractive risk-adjusted returns for shareholders. Third, its geographic focus means that it operates in supply-constrained markets with strong economic fundamentals. As a result, there is little threat of excess supply flooding the markets, which means that its properties have a strong moat around them. Given the technology sector-fueled job growth in its markets and constrained supply along with its development and redevelopment capabilities, ESS has a bright future.
ESS has also proven to be quite resistant to recessions due to offering a basic necessity, making its cash flow and dividend growth profile look even more promising in the event that we encounter a severe recession in the near future. For example, if funds from operations (FFO) per share actually increased during the last recession, from $5.57 in 2007 to $6.14 in 2008 and then $6.74 in 2009.
When combining its competitive advantages and low-risk profile with its 4% dividend yield and expected 5-6% FFO and dividend per share CAGR over the next half decade, ESS offers a very attractive risk-reward profile for investors looking for safe high yield.
The Legend of 'O'
Realty Income (O) is a legendary dividend growth stock due to its track record of crushing the S&P 500's total returns since it went public back in 1994 and paying out an attractive monthly dividend that it has increased for 27 consecutive years.
It enjoys immense scale, with a portfolio of 11,733 properties leased out on conservatively structured triple net leases to 1,147 tenants. O has an 8.8-year weighted average lease term and generates 43% of its rental income from investment grade tenants, giving it high visibility into its future cash flow stream. This cash flow stream has also proven to perform very well during recessions, further adding to the strength of its profile.
With an A- credit rating, a 6.3-year weighted average term to maturity for its notes and bonds, a fixed charge coverage ratio of 5.5x, 95% of debt being unsecured, 88% of debt at fixed interest rates, liquidity of over $2.5 billion, and a net debt to annualized pro forma adjusted EBITDA of 5.2x, O's balance sheet is fortress-like.
O stock currently offers an attractive 4.5% dividend yield that is very safe and likely to continue growing for many years to come given its strong business model and track record. O also trades at a meaningful discount to its historical averages on an EV/EBITDA, P/AFFO, and P/NAV basis. Combined with expected continued mid-single-digit annualized AFFO per share growth and the 4.5% dividend yield this creates an attractive risk-adjusted total return profile.
Make a Federal Case Out of This REIT
Finally, Federal Realty Trust (FRT) is a leading retail-focused REIT that owns, develops, and redevelops shopping centers in high-income, densely populated coastal markets in the U.S. These markets are likely to help FRT generate long-term outperformance due to their strong income and population growth trends.
With more than 3,100 tenants in over 105 properties and no single tenant providing even 3% of its annualized base rent, FRT is well-insulated against retail bankruptcies that may develop as e-commerce continues to grow and potential future recessions take their toll on retailers and their landlords.
In addition to its concentration on markets with favorable income and demographic trends, FRT also creates value for shareholders by leveraging its strong A- rated balance sheet to invest in its current and new properties at attractive rates of return. In addition to driving rental income growth, these investments also keep its assets fresh and attractive to tenants and shoppers alike, further strengthening their competitive positioning.
While certainly not recession proof, FRT performed pretty well during the last major recession and will likely do so again during the next recession given its diversification, the strength of its markets, and the quality of its tenants and properties. In the last major recession, its FFO-per-share grew by 6.4% year over year in 2008, declined by 8.8% in 2009, and then grew by 10.5% in 2010. As a result, we have confidence in the continuation of its long-term dividend growth streak.
With the economic uncertainty at a very high level, safe and attractive income investments are more valuable than ever to investors. With proven and attractively priced high-yield REITs like ESS, O, and FRT, investors have access to some of the best real estate portfolios, management teams, and business models in the world that should continue to churn out growing streams of income for many years to come.