Two High-Reward Real Estate Investment Trusts (REITs) to Acquire Excessively and One to Shun

Two High-Reward Real Estate Investment Trusts (REITs) to Acquire Excessively and One to Shun

The standard REIT typically offers a yield of approximately 3.9%, which is quite enticing when compared to the meager 1.2% yield from the S&P 500. However, there are REITs that boast even higher returns. For instance, AGNC Investment currently boasts a yield of 0.73%, an impressive 14.9% figure! But hold up, before you jump at this eye-catching yield, consider this.

The striking high yield from AGNC Investment might send chills down your spine instead of excitement. The primary reason behind this shocking figure is that AGNC is a total return investment, not primarily an income investment. A graph will help make things clear.

The orange line in the graph, representing the dividend, started strong but has seen a consistent decline for years. The purple line, signifying the stock price, followed a similar trend, rising and then falling. If you relied on the dividend for living expenses, you'd end up with less income and wealth, a less than desirable situation. However, pay attention to the blue line, indicating the total return. If you reinvested the substantial dividend, you'd have fared much better, as the reinvested dividend compensated for the downward trend in the stock price. This isn't your run-of-the-mill dividend stock.

Most income investors aim to live off of their collected dividends in the future, so AGNC Investment may not be an ideal choice for such investors. The eye-popping yield will fail to provide significant benefits if you don't reinvest it all back into the stock.

Two high-yield REITs that could pique your interest

If you're open to accepting some risk for a higher yield, which is a reasonable assumption if you've considered AGNC, you might want to explore Innovative Industrial Properties. While the name is rather plain, this REIT specializes in owning cannabis-related assets. Yes, it's not risk-free, but you could argue that it's innovative. The REIT owns 108 properties across 19 states, with a strong focus on marijuana growing facilities.

The legal status of cannabis is somewhat ambiguous, posing the risk here. However, the legal marijuana market is growing and is projected to surpass the beer and spirits segments in size by 2028. So, there's a solid business foundation at play. Innovative Industrial Properties' adjusted funds from operations (FFO) payout ratio was a reasonable 85% or so in the third quarter of 2024. While not low, it leaves ample room for unforeseen challenges before a dividend reduction becomes necessary. Notably, the dividend has been raised every year since 2017 (the REIT was launched in 2016). This presents a potentially good risk-reward balance for those comfortable with some regulatory uncertainties.

A far less thrilling REIT to invest in is VICI Properties, which specializes in experiential properties. While that includes things like gyms and bowling alleys, the main attraction here is casinos. VICI owns some of the largest gaming facilities in North America in some of the largest gaming markets in North America, operated by some of the largest casino companies in North America. As the old adage goes, the house always wins. In this case, the lessees are obligated to pay their rent, regardless of the economic situation or their businesses' performance.

This has resulted in surprisingly consistent performance, even during the coronavirus pandemic when casinos were essentially shut down. In fact, the dividend has continued to grow steadily since it was first introduced in 2018. The dividend growth rate has also been commendable, averaging around 7% per year, significantly exceeding historical inflation growth rates.

While there are only a limited number of casinos for the REIT to acquire, the leases it creates are long-term (with an average of 41 years) and include rental increases. So, there's no reason to assume that the "house" will stop winning anytime soon, given that the adjusted FFO payout ratio was a robust 75% or so in the third quarter of 2024.

Remember, high yields are easy to find, but worthwhile high yields require careful consideration

Finding high-yield stocks isn't overly challenging. The real challenge is identifying high-yield stocks that are actually worth investing in. While AGNC isn't a terrible company, it's not an income investment, no matter how high its yield may climb. Instead, consider high-yield alternatives like Innovative Industrial Properties or VICI, both of which are backed by strong and growing businesses.

Investing in high-yield REITs like Innovative Industrial Properties or VICI requires careful consideration beyond just the yield. Despite AGNC Investment's impressive yield, it's not primarily an income investment, as its dividend's decline over the years demonstrates.

Innovative Industrial Properties, with its focus on cannabis-related assets, offers a potentially good risk-reward balance for those comfortable with regulatory uncertainties. On the other hand, VICI Properties, specializing in casinos, has shown consistent performance, even during challenging times, with a steady dividend growth rate exceeding inflation rates.

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