The S&P 500 yields 1.4% currently, making it difficult for investors living off dividends to see much in the way of income from the market as a whole.
One sector that often has high yields, primarily due to laws governing their operation, are real estate investment trusts. As such, we will look at two REITs that are paying a considerably high dividend yield compared to the market index.
National Retail Properties
National Retail Properties Inc. (NNN, Financial) owns approximately 3,000 single-tenant properties in the U.S. The trust focuses on smaller retail tenants as these customers are less likely to change locations due to rate increases. National Retail has a current occupancy rate of almost 99% and collected nearly 96% of rent in the most recent quarter, showing that the trust appears to have survived the worst of the Covid-19 pandemic. National Retail generated revenue of more than $660 million in 2020 and has a market capitalization of $8 billion as of Monday's trading close.
The company raised its dividend 1% for the Aug. 14, 2020 payment, giving the trust 31 consecutive years of dividend growth. While the most recent raise was below the dividend's compound annual growth rate of 3.1% over the last decade, I find it impressive that the trust raised its dividend at all considering the hardships that Covid-19 caused for smaller retail clients.
Shares of the trust yield 4.6% as of the most recent trading session. For context, National Retail has an average dividend yield of 4.7% over the last decade. However, the average yield drops to 4.3% for the past five years.
Following the most recent increase, the annualized dividend is now $2.08. According to Seeking Alpha, Wall Street analysts who cover the trust expect National Retail to produce funds from operation of $2.60 for 2021. The projected dividend payout ratio is 80% for the year. This is an elevated payout ratio to be sure, but matches exactly to the 10-year average payout ratio. The high payout ratio means lower dividend growth until the business environment becomes more normalized, but the dividend is likely safe.
National Retail most recently traded at $45.45, resulting in a forward price-FFO ratio of 17.5. The average price-FFO ratio since 2011 is 15.6, so shares are trading at a premium to the historical multiple.
Looking at the GF Value, shares look only slightly overvalued.
National Retail has a GF Value of $44.04, placing the stock's price-to-GF Value at 1.03. Shares would have to fall 3.1% to reach the intrinsic value according to GuruFocus.
There might not be much upside potential in National Retail by way of multiple expansion, but the stock offers a yield that is three times that of the S&P 500 index. Just as important, the dividend is likely safe, even if future dividend growth could remain muted until business improves.
Starwood Property Trust
Starwood Property Trust Inc. (STWD, Financial) is a commercial mortgage REIT, which originates, finances, acquires and manages loans, other debt and equity investments. Starwood and other names in the commercial mortgage space tend to benefit from low interest rates as they can borrow and invest at low costs. The company had its initial public offering in 2009. Last year, Starwood had revenue of $1.1 billion and is currently valued at $7.1 billion.
Starwood's dividend has been maintained at the same amount of $1.92 since 2014. As you might expect, dividend growth has compounded at a very low rate, less than 1%, since 2011.
Where Starwood makes up for its lack of dividend growth is with its yield. Shares yield 7.7%, compared to the 10-year average yield of 9.4%. This would be the stock's lowest yield since at least 2011 if it were to average the current yield for an entire year. On the other hand, shareholders are receiving 5.5 times the income of the S&P 500 Index.
Analysts expect the company will produce distributable earnings per share, a similar metric to FFO but includes items such as deprecation and amortization, of $2.04 in 2021. Using the annualized dividend, the expected payout ratio is 94%. As with National Retail, this is high, but below the long-term average. The average payout ratio over the last 10 years is just over 100%.
Starwood closed the last trading session at $24.93, resulting in a forward price-earnings ratio of 12.2. The average price-ratio since 2011 is 10.7.
Shares look slightly less expensive when looking at the GF Value.
GuruFocus finds that Starwood has a GF Value of $23.03, giving the stock a price-to-GF Value of 1.08 today. The stock would have to decline 7.5% to reach its GF Value.
Mortgage REITs are often inherently riskier due to the nature of the business. These companies depend on low rates in order to provide cheap liquidity that can allow the business to grow. Right now, interest rates are very low and will likely remain so for the foreseeable future. This should allow for Starwood's dividend to remain safe, even if dividend growth going forward is unlikely.
Final thoughts
Finding income in today's markets remains a challenge, but the real estate sector provides plenty of names with high-yielding dividends that appear safe. Both National Retail and Starwood offer very generous yields, especially compared to the broad market average.
National Retail and Starwood are trading above their long-term historical valuations, but look more attractive when using intrinsic value.
Of the two, National Retail is probably the safer pick given its business model and dividend growth track record. For more conservative investors, dividend safety and growth could compensate for the lower yield. Stocks like Starwood may not be for the most risk adverse investors, but those willing to accept more risk can be rewarded in the amount of income they receive.
Disclosure: The author has no position in any stocks mentioned in this article.
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