Four REIT stocks pass strict quality screen with dividend yields as high as 6.19%

Investors can never predict the exact timing of a rate cut, but many expect the Federal Open Market Committee to begin narrowing the target range for the federal funds rate on Sept. 18 after its next policy meeting.

The federal funds rate has been in the range of 5.25% to 5.50% since July of last year. This has made it easier for some income-seeking investors to avoid tough decisions with 5% bank CDs available. An investor who wonders why an advisor would recommend a bond investment when attractive CD rates (in Federal Deposit Insurance Corp.-protected accounts) are easy to find may not understand that “short-term bank yields disappear ,” according to Lewis Altfest, CEO of Altfest Personal Wealth Management, which he founded in 1983 and manages $1.7 billion in client assets.

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Evidence that some investors agree with Altfest is provided by the inverted yield curve for US Treasuries. The Federal Reserve has kept short-term rates high in an effort to curb inflation. The three-month Treasury yield BX:TUBMUSD03M was 5.22% early Monday, while the 10-year Treasury yield BX:TUBMUSD10Y was just 3.89%. In a lower inflation environment, it would be typical for long-term interest rates to be higher than short-term rates.

Long-term rates are already low because demand for long-term bonds is high – investors have loaded up on long-term bonds, which could indicate that they expect the US to go into recession, or at least that is expected in the short term. rates to decrease. When bond prices rise, their market yields fall.

Share prices of REITs can move in a similar manner to bonds (in the opposite direction to interest rates) because these companies are required to pass on at least 90% of their profits to shareholders in the form of dividends in return. for tax benefits. REITs fall into two broad categories. Equity REITs own and lease properties or sell them for profit after purchasing, developing or improving them. Mortgage REITs are primarily lenders or investors in mortgage-backed securities.

The story continues

So far this year, without dividends, the real estate sector of the S&P 500 SPX is up just 4.3%, for the second-worst performance among the 11 sectors of the benchmark U.S. large-cap stock index. This could reflect concerns about high vacancies and falling property values ​​for office buildings. This is one reason why you should do your own research to form your own opinion when considering any investment.

Similar coverage from Joy Wiltermuth:

REIT Stock Check

For a broad screen of the REIT space, we started with the Russell 3000 Index RUA, which is designed to represent about 98% of the companies that are publicly listed in the US. The index includes 172 REITs of various types.

Investors will naturally be interested in REITs with high dividend yields. So the screen focuses on companies’ ability to raise their payouts, or at least avoid lowering them.

In the REIT industry, a metric called funds from operations, or FFO, is typically used to gauge a company’s cash flow that is available for dividends. FFO adds depreciation and amortization (non-cash figures) back to earnings while offsetting gains from the sale of property. Going forward, adjusted funds from operations, or AFFO, offsets the costs of maintaining the properties that REITs lease.

So an obvious way to screen REITs for dividend coverage would be to look at consensus AFFO estimates. But we went further to adopt a conservative approach.

During an interview with MarketWatch, Altfest said REITs with high dividend yields “can be attractive,” but warned investors not to expect their share prices to rise. “It’s going to be difficult for these companies to grow because they pay out the largest percentage of cash flow,” he said.

When we made our first cut for the REIT screen, we whittled down the list of 172 companies to 108 covered by at least five analysts polled by FactSet and for which consensus 2025 AFFO estimates were available. Dividing the AFFO per share estimates by current stock prices -provided estimated AFFO returns. Comparing AFFO yields to current dividend yields showed whether or not there is room to pay higher dividends based on estimates.

There remained 87 REITs for which the indicated margin in 2025 was at least 1%. And when we sorted this list by current dividend yield, there were four REITs with yields above 10%, with two above 13%.

“There are people who get caught up in REIT yields,” Altfest told MarketWatch. “The 13% you’re talking about is clearly not a high quality yield. There’s something going on there.” In other words, the high dividend yield means that investors have shied away from these stocks.

For additional screens for quality, Altfest suggested looking at revenue. “If you see their revenue going down, that could indicate trouble — for example, in an office building REIT where rents have gone up and they’re having trouble re-signing or getting someone new in there,” or for which the REIT must decrease what it charges per square foot upon renewal.

So we whittled down our REIT list further, removing any company whose quarterly earnings per share declined from the previous quarter or from the previous quarter. We used per-share numbers rather than raw revenue numbers because the per-share numbers reflect any dilution to shareholders from issuing new money to raise shares. This left us with 38 REITs.

Then, since depreciation and amortization are added back to earnings as part of the AFFO calculation, we took our screen a step further. Altfest asked, “Doesn’t the largest proportion of the dividend come from depreciation?”

It turned out that of the remaining 38 REITs, only four passed this last part of the enhanced screen. All are equity REITs. Here they are, sorted by dividend yield:

Click on the tickers for more on each company.

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