3 Best High Dividend REITs

The Vanguard Real Estate Index Fund ETF Shares (VNQ), which is the biggest real estate ETF in the world, only offers a 4% dividend yield.

That’s pretty disappointing considering that money market funds are currently offering about 5%.

Why is VNQ yielding so little?

There are three main reasons:

1. It is heavily exposed to growth REITs that invest in data centers, cell towers, e-commerce warehouses, and other lower-yielding, but faster-growing property sectors. Its top holdings are lower-yielding REITs like Digital Realty (DLR) and American Tower (AMT).
2. Moreover, the ETF is also market cap weighted, which means that most of its capital will go towards mega-cap REITs, which tend to trade at higher valuations, use less leverage, and maintain low dividend payout ratios.
3. It also invests in non-REIT companies like home builders and brokers, which often do not pay any dividend.

But this actually isn’t representative of the REIT sector. Most REITs are smaller and invest in traditional property sectors that offer much higher yields.

Quite a few of them offer dividend yields exceeding 8%, and these yields are generally safe and growing.

Here are 3 of my favorite high-yielding REITs to buy today:

NewLake Capital Partners, Inc. (OTCQX:NLCP)

NLCP is a REIT that focuses on cannabis cultivation facilities, and it currently offers an 8.1% dividend yield. This high yield would seem to suggest that the company is struggling, over-leveraged, and at risk of cutting its dividend.

But none of this is true:

• NLCP enjoys some of the best growth prospects of any REIT.

• It has zero debt and a significant cash position.

• Its payout ratio is conservative for a net lease REIT with zero debt at 82%.

The REIT has managed to hike its dividend in nearly every quarter since going public. It just took a break in 2023 to focus on share buybacks instead:

And I think that this strong growth will continue because:

• It has over 10 years left on its leases on average, and these leases enjoy nearly 3% annual rent escalations.

• The REIT has $25 of cash and access to $90 on a credit facility at a 5.75% interest rate locked until 2027. That’s very significant for a company with a $400 market cap, and it could all be invested into new properties at a 12% cap rate, resulting in a huge spread over its cost of capital.

• Finally, the REIT retains nearly 20% of its cash flow to buy back shares at a double-digit cash flow yield and a discount to NAV.

So the high yield is not the result of high-risk or poor fundamentals, but rather because of its low valuation, trading at just 10x FFO.

I suspect that as NLCP starts to deploy this capital and its growth accelerates, the market will reward it with a higher valuation multiple, unlocking upside for shareholders.

Simply going from 10x FFO to 13x FFO would unlock 30% upside, and the REIT would still trade at a very reasonable valuation for a net lease REIT with zero debt. While you wait, you earn an 8.1% dividend yield.

The dividend was already hiked once in 2024 and will likely be hiked again later this year.

EPR Properties (EPR)

EPR Properties is a net lease REIT that focuses on experiential properties, and it is today priced at an 8.3% dividend yield.

Again, this high yield seems to suggest that EPR’s dividend is risky, but in reality, its payout ratio is historically low at 69%, and recently, the REIT hiked its dividend by another 3%. That’s not typical of a REIT that’s likely to cut its dividend.

We think that the high yield here is not the result of high risk, but simply of a low valuation, just like in the case of NLCP.

The REIT market appears to worry about EPR because it focuses on experiential properties such as movie theaters, golf complexes, ski resorts, and amusement parks. It would seem that such properties would suffer in a recession. But what the market appears to ignore is that:

• EPR is a net lease landlord, not the operator of these assets.

• It has 14-year-long leases on average with pre-defined rents, and it will enjoy 2% annual rent increases even if we go into a recession.

• Its tenants are unlikely to default on their leases even if they temporally suffer because these properties are essential to their businesses.

• Its rent coverage ratios are today historically high at 2.2x on average, meaning that even if its tenants saw a sharp decline in their profits, they should still be able to cover rent payments.

• Finally, most of these experiential categories are affordable forms of entertainment that perform fairly well during recessions. People may skip their trip to Europe, but they will still visit the local water park.

This year, the REIT has guided to grow its cash flow per share by another 4% and the management believes that they can maintain this pace of growth even without having to access the capital market.

An 8.3% dividend yield coupled with a 4% growth rate gets you well into double-digit returns. And as EPR keeps proving the market wrong, and interest rates eventually return to lower levels, we are likely to see its multiple also expand back closer to 12x FFO, unlocking an additional ~50% upside from here.

Armada Hoffler Properties, Inc. (AHH)

AHH is a diversified REIT that owns mostly strip centers, apartment communities, and office buildings, and it is today priced at a 7.2% dividend yield.

Again, this is despite having a low payout ratio of 75% and recently hiking its dividend by another 5%. The management even issued the following encouraging statement:

“First, as you probably have already seen, we’ve raised the dividend a solid 5% to $0.205 per quarter… More importantly, it is indicative of management’s confidence in the trajectory of our business model, increased property NOI, strong leasing activity and development income expected to come online in the fourth quarter, all factor into our confidence in our core business and sustainability of our current cash flows.”

But even then, the yield is so high because the company’s valuation is exceptionally low, trading at just 9x FFO.

Why is it so cheap despite performing well?

I think that there are three main reasons:

• First off, the market generally does not like diversified REITs. It tends to penalize them with a lower multiple due to their lack of focus. However, in the case of AHH, I actually think this approach makes sense because it specializes in the mid-Atlantic/Southeast. So what it lacks in sector specialization, it makes up in geographic specialization.

• Secondly, this is a small REIT with a $1 billion market cap. Small REITs trade today at materially lower valuations than large REITs.

• Finally, the REIT generates 30% of its revenue from office buildings, and the market hates this property sector. I also dislike office buildings. I fear that the sector is going to face severe long-term headwinds. However, I still recognize that not all office buildings are created equal, and AHH owns exactly the types of buildings that should fare well going forward. These are newly built Class A office buildings located in walkable mixed-use destinations. They are also under long-term leases, providing stability even as the sector currently faces oversupply.

Therefore, I think that this low valuation is unwarranted. The REIT owns amazing multifamily assets and service-oriented strip centers, and those are discounted simply because the market hates small diversified REITs. But historically, AHH has done very well by following this strategy and the management is one of the biggest shareholders of the company:

Just like EPR, I expect AHH to eventually reprice at closer to 12x FFO, which would still represent a steep discount relative to most peers but unlock nearly 40% upside from here.

What are the catalysts? I think that as the REIT keeps increasing its exposure to multifamily, and interest rates eventually return to lower levels, the REIT will start to attract more investors.

While you wait, you get paid generously to wait.

Closing Note

There are lots of high-yielding REITs out there if you know where to look. The REIT market is today priced at one of its lowest valuations in many years, and there are lots of ~8% yielding REITs out there.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.