These high-yielding dividend stocks are up nearly 40% over the past year. Is it too late to buy?

The National Association of Real Estate Investment Trusts (NAREIT) recently launched performance data for REITs. The sector had a strong return this year. REITs outperformed the market in the third quarter, rising 16.8%. It has continued its strong run over the past year, with the FTSE Nareit All Equity REIT index up 39.1%.

This is a strong return for a sector known for paying high dividend yields. Mediate REIT currently yields around 4% compared to less than 1.5% for S&P 500. Here’s a look at whether they high yielding dividend stocks they are still worth buying after they have grown over the past year.

What’s driving the REIT rally?

REITs are very sensitive to changes in interest rates. This is evident in the diagram:

Data source: NAREIT.

As this chart shows, rising interest rates from the end of 2021 (as measured by the 10-year Treasury) heavily impacted REIT share prices by the end of last year (REITs lost more than 30% of their value on average). However, the 10-year yield has fallen over the past year in anticipation of the Federal Reserve’s reduction in federal funds ratewhich he finally did last month. This helped spark a rally in REIT share prices, particularly in the last quarter.

The the REIT sector rally was enough spread out. The only sectors that have not participated in the rebound this year are industrials, lodging/resorts and Timberland REIT, which are more economically sensitive. Meanwhile, the biggest gain has come from specialty REITs, which are up 50% this year.

That’s largely due to growth Iron Mountainhis (MRI -0.13%) share price. The information storage REIT saw its stock price more than double from last year. Its The Matterhorn Project is indeed payment of dividends by driving accelerated revenue and earnings growth for REITs.

Can REITs Continue to Recover?

Despite the rally over the past year, most REITs are still trading well below their early 2022 highs, which was even before the Fed started raising rates. For example, driving net leasing REIT Real estate income (A -0.62%) it is currently more than 20% below its peak of a few years ago. Because of this, it still offers an attractive dividend yield of 5%. While higher interest rates have acted as a headwind for Realty Income in recent years, REITs have he still managed to continue the unbroken streak of dividends increases (108 straight quarters).

The company expects to increase its adjusted funds from operations (FFO) at an annual rate of 4% to 5%. in the future as it continues to acquire income-producing real estate. Because of this, Venitul Realty can produce a solid total return (9% to 10% annually), even if its valuation doesn’t return to its peak of a few years ago. Meanwhile, there is further upside potential if its valuation continues to improve.

Top REITs Federal real estate investments (FRT -0.21%) and Prologue (PLD 0.31%) also still trade at a more than 20% discount to their early 2022 peak levels. Both REITs are likely stronger today than they were then.

Federal Realty sees record leasing across its retail portfolio as retailers continue to seek high-quality locations, which is leading to constant rent increases. The retail REIT also continues to invest in expanding its portfolio (it recently bought two assets for $275 million and is investing $840 million in redevelopment and expansion projects). These growth factors have enabled REITs to do continue to expand its industry-leading dividend growth streak (57 consecutive years).

Prologis capitalizes on strong demand for its warehouse properties, which is maintaining high occupancy levels and generating strong rental growth. The leading industrial REIT has also invested heavily to expand its portfolio (it bought rival Duke Realty in a highly lucrative $23 billion deal in 2022). In addition, it invested to develop new warehouses and expand into the rapidly growing data center development market.

Despite the interest rate headwinds, Prologis has seen compound annual FFO per share growth of 13% and annual dividend growth of 14% over the past three years. With significant growth ahead, the REIT has strong total return potential from here.

This hot sector still occurs run

REITs have risen sharply over the past year, largely due to expectations of lower interest rates. Once the Federal Reserve finally starts cutting rates (and likely more cuts), REITs should have more room to recover.

Several high-quality REITs remain well below their peaks of a few years ago, even as they thrived amid higher rates. For this reason, the sector still looks attractive, especially for those looking to cash in on their growth potential.