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11 High-Yield REITs for Big Income

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Investors looking to bolster their income portfolios have long looked to dividend-friendly real estate investment trusts (REITs) to get the job done. But recently, the appeal of high-yield REITs has intensified, thanks to changes to conventional investing wisdom.

For more than a quarter century, the "4% rule" governed many investors' withdrawals from retirement savings. According to this rule, investors would have sufficient funds in their portfolio to last a lifetime if no more than 4% was withdrawn from the portfolio in year one of retirement, with the withdrawal rate in subsequent years increasing only as much as needed to keep pace with inflation. Dividend investors, then, could comply with the 4% rule and never need to touch their principal by building a portfolio that yields 4%.

Times change, however. Financial advisor Bill Bengen, who created the 4% rule, recently updated his advice in the October issue of Financial Advisor magazine. Bengen now thinks 5%, not 4%, is the right amount for retirees to withdraw annually in the current low inflation environment.

For dividend investors who want to preserve principle, that means designing a portfolio that yields 5%.

The problem? You might have noticed that stocks paying 5% in dividends are hard to come by, especially in today's richly valued stock market. But a good place to start is with REITs, whose above-average yields are largely a product of the REIT structure requiring the majority of taxable earnings to be paid as dividends.

Here are 11 high-yield REITs with a collective average yield of more than 5%. Some have been more battered than others by the pandemic, but all have solid balance sheets that are keeping them afloat as they weather the COVID-19 storm.

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W.P. Carey (WPC, $70.03) is a leading net-lease REIT that invests in high-quality, single-tenant properties. Net-lease REITs reduce risk by passing property-specific expenses (usually maintenance, insurance and taxes) directly along to the tenant and embedding contractual rent increases in leases. That makes the REIT's income more predictable and reliable.

W.P. Carey owns 1,216 properties across the U.S. and western Europe. Its properties are leased to 352 different tenants. The REIT boasts a well-diversified tenant base, with industrial, warehouse and office properties representing nearly 70% of the portfolio and only 17% retail exposure, which has helped to reduce the effects of the pandemic on 2020 occupancies and rents.

During the June quarter, the portfolio showed a 98.9% occupancy rate and average remaining lease term of 10.7 years.

A portfolio diversified by property type helped to keep rent collections strong during the third quarter, with 100% collection for self-storage, office and retail, 99% for industrial and 94% for warehouse. Adjusted funds from operations (FFO, an important profitability metric for REITs) declined 11.5% on a per-share basis but exceeded analyst estimates.

With over $1.9 billion of liquidity, WP Carey will be able to step up investments in new properties, which should fuel 2021 AFFO growth.

W.P. Carey also continues to be one of the most attractive high-yield REITs because of its slow but frequent and persistent dividend growth. The company hiked its quarterly payout for a 78th consecutive quarter in September, from $1.042 per share in June to $1.0440. AFFO payout ratio is also low for a REIT, at 85%, giving W.P. Carey additional flexibility to continue hiking dividends.

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Another REIT investing in single-tenant net-lease properties is National Retail Properties (NNN, $40.13). This REIT has tenants across 37 different industries, though its largest tenants are convenience stores, quick-service restaurants and automotive service providers. Its portfolio consists of 3,114 properties leased to 380 tenants and spread across 48 states.

The quality and diversity of its tenants has enabled this REIT to maintain occupancy rates well above the REIT average for 17 years and deliver 5.8% annual core FFO per share growth since 2014. As noteworthy, National Retail has generated 31 consecutive years of dividend growth while actually reducing its payout ratio over time. Payout during the third quarter was a safe 84% of FFO.

The REIT's core FFO per share fell by just 4% during the first nine months of 2020, and the company maintained a 98.4% occupancy rate. A solid balance sheet showing $294.9 million of cash, the full amount available on a $900 million line of credit and no debt maturities before 2023 gives NNN great financial flexibility.

National Retail Properties actively manages its portfolio, too, with 21 properties acquired for $74.1 million so far this year and 25 sold that generated a $13.6 million gain on sales.

NNN was highlighted at the beginning of 2020 as one of the best retirement stocks to buy, and it continues to prove its worth as a long-term investment. This high-yield REIT has generated 11.1% average annual total returns over the past quarter-century, fueled in part by a dividend that has grown for 31 consecutive years.

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