Summary
Most REITs yield only 2-3% at today’s elevated prices.
Even then, we are able to earn closer to 5-6% by being selective.
We highlight our favorite REIT sub-sectors to find high yield and present 2 of our top picks to earn big dividends.
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BrianAJackson/iStock via Getty Images The REIT market is up a lot lately, and as a result, the average dividend yield of the Vanguard Real Estate ETF (NYSEARCA: VNQ ) has come down to just ~2.5%: Data by YCharts Now, I don’t know about you, but in my opinion, 2.5% is not enough for a real estate investment.
Real estate is supposed to be an income-driven investment first and foremost, and unless I can get at least 4-6% annually, it is hard to get me excited.
That’s partly why we called our marketplace service, High Yield Landlord.
We want to get paid substantial income while we wait patiently for long-term appreciation. Contrary to popular belief, you can still earn a 5-6% dividend yield by investing in REITs, but it requires you to be more strategic and selective about your investments.
To be more specific, you will need to look for opportunities in sub-segments of the REIT market that aren’t so crowded. At this time, we invest heavily in: Foreign REITs: REITs are very popular in the US. However, they aren’t nearly as popular in many other countries, and as a result, they commonly trade at much lower valuations and higher yields in foreign countries.
Small-Cap REITs: Today, large-cap REITs trade at 22x FFO, whereas small-cap REITs trade at just 11x FFO on average. In other words, for every dollar invested, you get twice as much cash flow when investing in smaller and lesser-known REITs.
Pandemic-impacted REITs: Most REITs have fully recovered by now and trade at all-time highs. However, there are still a few property sectors that continue to trade at 20-30% discounts to pre-covid levels because of temporary pain that won’t last for much longer.
In what follows, we will highlight two such REITs that currently yield upward of 6%, and offer double-digit total return potential in the years ahead. NorthWest Healthcare Properties (NWH.UN / OTC:NWHUF )
Most Canadian REITs aren’t worth buying because they: They lack a clear strategy/specialization,
They suffer significant conflicts of interest,
And they are not pricey enough to profit from accretive growth, or cheap enough for you to profit from repricing potential.
History has shown that such REITs do relatively poorly over time, and yet, most Canadian REITs suffer from at least one of the above factors. They own diversified portfolios, lack specialization, are often externally managed, and their valuations end up in a range that limits their ability to raise capital and grow. At High Yield Landlord, we typically look for the polar opposite: we want to buy REITs that are highly specialized and shareholder-friendly at the cheapest price possible.
But exceptions exist and NorthWest Healthcare Properties is one of them. We recently initiated a position in the company because we think that its 6% monthly-paid dividend yield is not only sustainable, but set for growth, and the company has the potential to generate 10-15% annual total returns in the years ahead.
NorthWest is a Canadian healthcare REIT that specializes in hospital and medical office building investments. But unlike most other healthcare REITs, NorthWest targets mainly hospitals in Canada, Australia, and Asia, allowing it to get more lucrative deals due to the relative lack of competition in these markets: Picture of Danforth Health Centre – one of their properties in Toronto: But that’s not all.NorthWest also operates an asset management business which accelerates its growth prospects by reducing its own requirement for equity, earning fees, and increasing its returns in the process. The below illustration uses a low 5% cap rate and NWH.UN is still able to earn a high 12% return without accounting for any appreciation:NorthWest routinely buys properties at 100-200 or even 300 basis point higher cap rates so it just shows you how lucrative this approach can be.Best of all, NWH.UN has a lot of demand from institutional investors for these investments. Its third-party assets under management have more than tripled since 2018 and they expect to double that again in the near term.These JV deals create substantial value for shareholders in a number of ways: It increases its returns and spreads on new investments. Thanks to […]
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