Dividend investors often focus too much attention on yield, overlooking obvious signs of risk.
You can earn returns of up to 12.5% from real estate investment trusts.
Dividend investors will likely be better off with lower yields like those offered by these two highly reliable REITs.
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I’m a dividend investor and I know what it’s like to explore stocks that offer double-digit yields. You want to believe that it is a diamond in the rough that will pay you dividends greater than 10% forever. Those situations happen, but not very often. Whether you have $500 or $5,000 to invest in dividend stocks right now, you want to make sure you focus on reliable dividend payers.
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Real estate investment trusts (REITs) are designed to transfer income to investors in a tax-efficient manner. They avoid taxes at the corporate level if they pay at least 90% of their taxable income in the form of dividends. The trade-off is that shareholders have to report dividends as if they were earned income (taxes can be avoided entirely by owning a REIT in a Roth IRA). Generally speaking, REITs pay attractive dividends and have relatively high dividend yields.
If you’re trying to live off the income your portfolio generates, REITs should be in the mix. However, just like non-REITs, you have to be careful about which companies you buy. Some REITs have impressive dividend histories, while others have volatile dividend histories. Some REIT business models, by design, pay variable dividends.
If dividend consistency is your top priority, there’s one REIT that stands out above all the others: Federal Real Estate(NYSE: FRT). It has increased its dividend annually for 58 consecutive years, making it the Dividend King. This is the longest dividend streak in the REIT sector, and Federal Realty is the only REIT to achieve Dividend King status.
Federal Realty achieved this goal by focusing on quality over quantity. It has approximately 100 shopping centers and mixed-use assets. They are usually located near large population centers that have high concentrations of wealth. Additionally, Federal Realty is an active portfolio manager and continually makes capital investments to enhance the value of its properties. He is also willing to sell assets that have reached their full potential, so he can buy new properties that need a little love.
Federal Realty’s dividend yield today is 4.4%. This is approximately 4 times greater than the 1.1% yield of the S&P 500(SNPINDEX: ^GSPC) index and above the REIT average of 3.9%. For most dividend investors, Federal Realty will be a solid portfolio, with $500 getting you about four shares of this reliable dividend stock.
However, to some investors, 4.4% will seem like a low figure when you can buy a REIT like AGNC Investment(NASDAQ:AGNC) with a yield of 12.5%. That yield is very attractive and the mortgage REIT is highly respected. However, it is not a reliable dividend payer. The following graph highlights the problem.
YCharts data.
If you need to use the dividends you collect to supplement your Social Security checks, you would have been sorely disappointed with AGNC Investment. Not only has the dividend been volatile, it has also been trending steadily downward for over a decade. And the share price has followed the dividend’s decline. Less income and less capital are not what most dividend investors have in mind when buying high-yielding stocks. I know for sure that this is not my goal.
Federal Realty is the cream of the crop when it comes to dividend-paying REITs. But it’s not the only reliable dividend payer in the REIT sector. For example, Real estate income(NYSE: O) It has increased its dividend annually for 30 years and has a yield of 5.4%.
The company owns single-tenant properties that use a net lease approach, meaning the tenant is responsible for the majority of costs at the property level. Realty Income is the giant of the industry, with a portfolio of more than 15,500 properties spread throughout the United States and Europe. While primarily focused on retail assets, the company also owns industrial properties and a diverse collection of unique assets, including data centers and casinos.
Additionally, it is also diversifying into lending and asset management for institutional investors. An investment of $500 will allow you to purchase eight shares of this dividend stock paid monthly.
Federal Realty and Realty Income are essential investments for dividend lovers. However, they aren’t the only reliable dividend stocks you’ll find in the REIT sector. They are just two very good examples of what you can find if you delve deeper into the sector.
Meanwhile, AGNC Investment is an example of the type of dividend-paying REIT to watch out for. The company meets its goal of producing attractive total returns, but that goal involves reinvesting dividends. That means you can’t use the dividend, which is highly volatile, to pay living expenses.
Make sure you put all the pieces of the puzzle together before buying dividend stocks. Dividend yield alone is not sufficient information to make a final investment decision.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool ranks and recommends Realty Income. The Motley Fool has a disclosure policy.
The Best High-Yield Stocks to Buy with $500 Right Now was originally published by The Motley Fool
