2 Ultra High Yield Real Estate Stocks to Buy Hand Over Fist and 1 to Avoid

Real estate investment trusts (REITs) can be excellent income-producing investments. They tend to offers much higher dividend yields (4% on average these days, compared to a dividend yield of under 1.5% on S&P 500). Meanwhile, the best aim to constantly increase their payouts.

WP Carey (WPC 2.25%) and EPR properties (EPR 1.95%) they are ideal REITs for those looking for a sustainable and growing income stream. They are much better options than many with higher yield Annaly Capital Management (NLY 0.65%)which may need to cut its dividend again.

A high-risk, high-return dividend stock

Annaly Capital Management currently offers a staggering dividend yield of nearly 13%. Almost 10 times higher than the S&P 500. While Mortgage REITs as Annaly tend to have higher yields, it appears to have a higher downside risk than others in the sector.

The concern is the continued decline in Annaly’s ( EAD ) earnings available for distribution. The REIT’s EAD was $0.68 per share in the second quarter, only slightly above its dividend payout. On a positive note, that it was an improvement from the first quarter, when EAD fell below payouts of $0.64 per share. However, it is well below last year’s level ($0.72 per share) and where it was at the end of 2022 ($0.89 per share). The company’s declining EAD forced it to cut its dividend by 26% in early 2023.

This wasn’t Annaly’s first dividend cut. It probably won’t be the last, given EAD’s continued decline. For this reason, income-focused investors should avoid this REIT.

Back on a growth trajectory

WP Carey is a Diversified REIT focused on ownership operationally critical properties net rented high quality tenants. It owns nearly 1,300 single-tenant industrial, warehouse and retail properties in North America and Europe. It also owns 89 self-storage operating properties. REIT net leases provide it stable increasing income every year due to built-in rent escalation clauses that either raise rents to a fixed rate or one linked to inflation. This stable income pretty much supports the REIT 6% yield dividend.

Until last year, WP Carey had a dividend growth record. However, this one made the strategic decision to exit the office sector by demerging and selling all of its office properties. As a result, it reset its dividend to reflect the low level of earnings and a desire to have a more conservative dividend payout ratio.

WP Carey has steadily rebuilt its portfolio since then, focusing on real estate sectors with better long-term fundamentals such as industrial building. It expects to invest between $1.25 billion and $1.75 billion in new properties this year (it has already secured $641 million in new investments by the end of July), which puts it on track to start increasing its flow of cash per share in the second half of the year. These new investments enabled REITs to start already rebuilding his pay, doubling it this year. This steady upward trend should continue in the future as he acquires more income producing properties.

An interesting income stream

EPR Properties is a specialty REIT focused on experiential real estate such as theaters, attractions, fitness and wellness facilities, and experiential lodging properties. It also has a small portfolio of educational properties (early education centers and private schools). It net lease these properties back to their operators. Those leases provide it stable income to cover the monthly dividend yielding over 7%.

Like WP Carey, EPR Properties has had to reset its dividend in recent years (it suspended its payment during the pandemic and then reinstated it at a lower rate). This lower payout level allows the REIT to retain more cash to fund new investments. They expect to invest between 200 and 300 million dollars per yearwhich it can finance through retained cash flow, property sales and its strong balance sheet. EPR Properties has completed $132.7 million in investments by the end of the first half and has $180 million in development and redevelopment projects under construction that it expects to fund over the next two years. It also selectively acquires experiential properties when the right opportunities arise.

EPR Properties’ growing portfolio and cash flow will allow it to increase its dividend. It has already raised its payout several times since the big post-pandemic reset, including by 3.6% earlier this year.

Better options for a sustainable and growing income stream

While Annaly Capital Management offers a spectacular dividend yield, that payout doesn’t seem sustainable. For this reason, income investors should avoid that REIT and buy WP Carey or EPR Properties instead. While their returns are not enough as high, I am good above average. Additionally, these REITs will likely continue to increase their payoutsmaking them better options for those looking for a sustainable and steadily growing stream of passive income.