Income-Producing REITs Worth Owning, According to a Veteran Analyst

“When Treasury yields were basically zero, you had to go to utilities or REITs for income,” he told Barron’s. “Now the fixed-income market is a viable alternative.”

As commercial real estate suffered setbacks in the past couple of years, the skidding prices of REIT stocks lifted the annual dividend yields of some into double digits. Lately, REIT yields have settled back to a 4.1% average, not too dissimilar from Treasuries.

Eventually, the Federal Reserve will cut interest rates back. That will create a welcome tailwind for REITs and the real estate industry, says the analyst.

For an investor with a long horizon, it still makes sense to own some REITs with solid balance sheets in good real estate sectors, says Sakwa. A successful REIT will grow its profits over time, so the shares should appreciate. “You’re not buying it just for the yield,” he says.

Segments of commercial real estate continue to face challenges. Urban offices sit vacant, and mall traffic ain’t what it used to be. But the worst problems affect private operators, not publicly held REITs, says Sakwa. The stock market discourages public REITs from levering up like some private owners do.

Residential real estate has been more solid than other parts of the property market, and Sakwa expects reliable dividend streams from two apartment REITs:

Equity Residential

(ticker: EQR) and

AvalonBay Communities

(AVB). He forecasts an annual dividend of $2.65 a share from Equity, which amounts to a 4% yield at the stock’s recent price of $65. AvalonBay’s expected payout of $6.76 a share represents a 3.6% yield, at the stock’s $185 price.

Both apartment REITs have grown their dividend payouts over time. AvalonBay’s has grown at a 5% annual rate, while Equity’s has grown at around 2.6%.

In retail, Sakwa likes

Kimco Realty

(KIM), a reliable operator of suburban shopping centers. Its 92-cent-a-year payout would represent a 4.6% yield on the $20 share price over the next 12 months.

The mall operator

Simon Property Group

(SPG) is another favorite. It has grown its dividend 5% a year, with the current annual dividend of $7.70 amounting to a 6.5% yield. Simon Property has a very good balance sheet, Sakwa notes, and has regularly boosted its dividend as a show of confidence in its malls.

The office REIT

BXP

(BXP) used to be known as Boston Properties, and Sakwa still likes the company’s portfolio of premier buildings. Heavy spending has limited its annual dividend growth to less than 2%, but as BXP stock fell from favor, its $3.92-a-year dividend has grown to near 6% in yield. BXP’s cash flow has comfortably covered its payouts, and Sakwa thinks that will remain the case.

One other solid income play among REITs is

VICI Properties

(VICI), an owner of so-called net-lease properties in the gambling industry, including Las Vegas Strip casinos such as Caesars Palace, the MGM Grand, and the Venetian Resort. VICI grew its dividend by 5.5% in each of the past five years, to a 5.4% yield on the stock’s $31 price.

Casinos were shuttered during the Covid pandemic, and VICI got every penny of rent during that period. “If it could survive through that,” says Sakwa, “I don’t know any other downturn that could be close to Covid.”

Write to Bill Alpert at [email protected]