With some parts of the broad market trading near record highs, it may be difficult to find a decent dividend yield. Investors looking for income still have opportunities, but they need to look a little harder to find them. One way is through the real estate investment trusts (reits) sector.
Many of these REIT stocks are distinguished by the fact that they do not have to pay corporate income tax unless they distribute at least 90% of profits as dividends. The best reits also belong to growth industries, where prices can also rise.
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Here are two reits that should be of interest to income investors.
1. Housing shortage means good things for weyerhaeuser
Weyerhaeuser (WKN: 854357) is a timber REIT, meaning it owns and manages forests. The company also processes wood into wood products. Weyerhaeuser is heavily dependent on the construction industry, especially residential construction. Lumber prices rose massively in the spring, fell in the summer and are rising again this fall. In the last month alone, lumber prices have risen 66%.
According to the national association of realtors, there is a gap of 5.5 to 6.8 million housing units in the housing market. At the current annual pace of 1.5 million construction starts per year, that would mean about four years of production to meet demand. Look at the chart below, which goes back over 60 years. The number of new housing starts is at the same level as during the eisenhower administration. Yet the population of the US has increased 88% since then. It's clear that supply is not keeping up with demand.
DATA FROM Y-CHARTS ON HOUSING CONSTRUCTION IN THE U.S
For weyerhaeuser, rising lumber prices mean higher profits. However, the company has an unusual dividend policy. It sets its normal quarterly dividend conservatively enough to maintain it even when the timber or housing markets are weak. If the company is highly profitable (as it is now), it also pays a variable dividend. The company just adopted this policy and the first variable dividend will be paid early next year.
The stock pays a quarterly dividend of $0.17 per share, representing a yield of 1.7%. In october a special dividend of 0.50 US dollar per share was paid and we have to wait and see how the fourth quarter earnings look before we can get an idea of the amount of the variable dividend. In view of rising lumber prices and strong demand for residential real estate, weyerhaeuser will achieve high profits in the foreseeable future.
2. Annaly pays a high dividend yield
Annaly capital management (WKN: 909823) is a mortgage REIT focused on U.S. Government-guaranteed mortgage-backed securities, non-government-guaranteed residential real estate loans, and loans to businesses. The different loan portfolios provide diversification and enable the company to perform well throughout the business cycle.
Mortgage reits differ from the traditional REIT business model. The typical REIT develops actual real estate, such as apartment buildings or shopping centers, and leases the units to individual tenants. This is an easy to understand model. Mortgage reits operate more like banks. You invest in mortgage debt and receive interest instead of rent for it.
Mortgage reits have some of the highest dividend yields on the stock market, but high yields aren't necessarily a sign of trouble. However, mortgage rices are very susceptible to financial shocks, which occur about every ten years. The last shock occurred at the beginning of the COVID 19 pandemic, when liquidity dried up in the market for mortgage-backed securities.
Annaly will run into problems in the future when the federal reserve starts reducing its purchases of mortgage-backed securities. So far, mortgages have weathered the fed's plans well, and we haven't seen a repeat of the "taper tantrum" of 2013, which was a tough time for mortgage REIT investors.
At current levels, annaly is trading at a slight discount to book value, which is typical for a mortgage REIT. In addition, annaly pays a quarterly dividend of $0.22 per share, giving the stock a 10.9% yield.
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This article reflects the opinion of the author, which may differ from the "official" recommended position of a premium advisory service of the motley fool. Questioning an investment thesis – even our own – helps us all think critically about investments and make decisions that help us become smarter, happier and richer.
This article was written in english by brent nyitray and published on 17.12.2021 on fool.Com published. It has been translated so that our german readers can participate in the discussion.
Brent nyitray has no positions in any of the above stocks. The motley fool has no positions in any of the stocks mentioned.
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