Consistent Income Strategy: High Dividend Yielding REITs

Posted by Terrance Wyatt on

Some of the most time-tested and successful strategies when it comes to investing in the stock market are those involving investments in companies with consistent and high yielding dividend payments to investors. A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. Dividends often provide investors with the opportunity to take advantage of the power of compounding. Compounding happens when we generate earnings and reinvest the earnings, eventually generating earnings from the earnings. Dividend compounding occurs when dividends are reinvested to purchase additional shares of stock, thereby resulting in greater dividends.

If you follow the legendary investor Warren Buffet you'll notice his top 5 holdings in his company Berkshire Hathaway all pay consistent dividends annually (see table below)

Company % of Portfolio Dividend Yield
KHC - The Kraft Heinz Co 22.2% of portfolio 2.64%
WFC - Wells Fargo & Co 17.5% of portfolio 2.73%
KO - Coca-Cola Co 14% of portfolio 3.49%
IBM - International Business Machines 9.5% of portfolio 3.22%
AXP - American Express Co 7.1% of portfolio 1.62%

 

Yet, with many solid "blue chip" companies in various sectors like those above hovering near all time highs in 2017 it may be difficult for new and/or younger investors free up enough capital for a  long term dividend investment strategy to start to make sense anytime soon.

However, an often overlooked sector that is comprised of many companies with a consistent dividend payout history, affordable stock prices,  and nearly unmatched dividend yields is the Real Estate Investment Trust sector (or REITs for short). 

So what exactly are REITs? A Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends. Most REITs are traded on major stock exchanges but there are also public non-listed and private REITs as well (We discuss REITs in detail in lecture 20 of the No Bull Investing course series).

As noted, a real estate investment trust is required to pay virtually all of its taxable income (90%) to its shareholders every year. The main benefit of a REIT is one level of taxation is removed (the REIT pays no taxes as long as they follow the rules). However, a limitation of REITs is the restriction of earnings retained by the REIT. In order to grow there may not be enough free cash to expand so the REIT will be in a constant process of raising capital (either debt or equity) in order to expand.

In the table below you can see the top 5 dividend yielding REITs as of 2017 provided from dividend.com

Company Dividend Yield
AGNC - American Capital Agency 10.86%
ARR - ARMOUR Residential REIT Inc. 10.04%
ARI - Apollo Commercial Real Estate Finance, Inc. 9.78%
ARR-A - Armour Residential REIT INC Preferred Series A 8.34%
ACRE - Ares Commercial Real Estate Corp 8.07%

 

As you can see, in comparison with the previous table the dividend yields presented here for investors are often double or even triple than those in the Berkshire Hathaway Portfolio. Also if you look up the symbols for these REITs you'll also notice the individual stock prices for these companies range anywhere from $18 - $24 per share which could be much more affordable than the $40 - $175 per share range for the stocks listed in Berkshire Hathaway's portfolio. 

However, once again a few caveats must be taken in consideration that we previously mentioned. The 1st being that REITs are tied to various sectors of the real estate market which isn't correlated with the overall stock market in most cases. So while stocks may be soaring in terms of growth during a bull market, many REITs will not often see that same huge growth and some REITs being much smaller operations could even see considerable volatility in terms of price when compared to blue chips stocks. 

Yet always remember, diversification is king in investing and having exposure to real estate investments such as those comprised in REITs along with blue chip stocks often beat out those dedicated to a single focused strategy over the long term as macroeconomic cycles in the overall economy may cause one investment vehicle to underperform for various periods of time.

 So what do you think? Are REITs something you would consider adding to your investment portfolio. Let us know in the comments. 


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