Kevin Brown: With a requirement to pay out 90% of their net income as a dividend, REITs are highly sought after investments for income-oriented investors. However, dividend yields are quite variable across the sector, so finding an attractive investment with a high, safe dividend combined with the potential for outperforming the market presents a unique challenge. We want to highlight some large-cap REITs that provide both a high yield and the potential for positive returns.
First, we like the big three healthcare REITS: HCP, Ventas, and Welltower. All three are currently providing dividend yields in the mid-5s and are trading below our fair value estimates for the companies. Dividends for all three companies are well covered by current cash flows, they have an established history of raising their dividend each year, and even during the uncertainty of the great financial crisis they maintained or raised their dividend.
The healthcare REITs have traded off in 2018 due to supply issues impacting senior housing operations in the short term, but there is evidence that supply is decreasing, and we expect there to be a significant demand wave positively impacting the sector over the next decade. We believe these companies will outperform as this supply-demand imbalance corrects. Of these names, we like Welltower the best.
We also like two retail REITS for income-oriented investors: shopping center REIT Kimco and mall REIT Macerich. Kimco is currently paying a U.S.-REIT-leading dividend in the high 6s, and Macerich is paying a dividend in the mid-5s. Again, dividends for these companies are well covered by current cash flows, and they regularly increase dividends to match cash flow increases. Retail REITs are oversold over fears of e-commerce growth impacting results, but their Class A properties should be relatively insulated as there will always be demand for high-quality retail. Of these names, we like Macerich the best.
In summary, there are several REITs that income-oriented investors should keep an eye on for both high dividend payouts and potential capital gains.