As the stock market continues the volatility that pushed it into bearish territory, many investors are looking for alternative sources of income. It’s not hard to beat the 1.7% average return seen among S&P500 stocks by simply investing in the safest dividend-paying stocks. With inflation still high around 8%, the ultra-high dividend yields offered by many real estate stocks right now are even more enticing.
Since REITs (REITs) are required to pay 90% of their taxable income as dividends, it is not uncommon to find REITs with dividend yields well above those found with S&P 500 stocks. However, not all high yielding real estate stocks are worth buying. In fact, some may be downright bad news.
To help you sift through the choices, let’s talk about two very high yield stocks worth buying by hand and avoiding like the plague.
1. Blackstone: A super secure yield of 5.4%
black stone (BX 2.38%) is one of the largest asset management companies, operating some of the most successful private equity funds and REITs today. The firm manages funds for high net worth individuals, insurance companies and private equity firms that invest in real estate, private and public debt securities, life sciences and other alternative assets. In return, the company receives a fee for its services.
In light of recent equity market volatility and high inflation, an increasing number of high net worth individuals have flocked to alternative assets, helping the company grow its assets under management (AUM) by 30% since last year to hit a record $915 billion. In addition to its meteoric growth, Blackstone Group enjoys an A+ rating by Fitch and S&P Global The ratings and its financial position are solid. It has a cash surplus of $18 billion and just over $9 billion in debt.
Unlike other real estate stocks, its dividend payouts fluctuate quarterly. A safe payout ratio is more important to the company than a steady increase in dividends, so it keeps its dividend payout within a maintainable range each quarter based on performance. Historically, its annualized return has averaged around 5% to 7%. Today, it pays a dividend yield of 5.4%.
A return of 5.4% may not technically be considered a ultra-high dividend yield, but at more than three times the S&P 500 average, it’s still an attractive high-yield stock for income investors. Add to that the security of the business and the opportunities for stock price appreciation and it’s clear to see why this is a real estate you’ll want to buy hands-on first.
2. Medical Properties Trust: This dividend has passed its health check
Medical Properties Trust (MPW 0.62%) is a hospital center Healthcare REITs. The company is the world’s largest hospital owner, leasing around 435 properties to 54 different hospital operators in 10 countries.
The stock has had a pretty brutal sell-off and it’s down 53% this year alone. The general volatility of the market has had an impact on its prices, but investors have also increased more and more concerned about rising interest rates affecting its ability to borrow more money and pay its current debts, which stand at around $9.5 billion. To make matters worse, one of the company’s tenants, Pipeline Health, filed for Chapter 11 bankruptcy in early October.
The company is taking aggressive action to reduce its debt exposure and increase its cash savings, having sold 11 properties in the third quarter of 2022. The company used the proceeds from the sale to pay down short-term debt, which has reduced its debt ratio to earnings before interest, taxes, depreciation and amortization (EBITDA) down from 6.3 to 5.8. The company has the potential for three more sales positioned to close in early 2023.
Its third-quarter earnings were also positive, beating estimates and motivating the company to raise its guidance for full-year 2022. Today’s battered stock price pushed its dividend yield to a very juicy 10.3% while the company maintains a healthy payout ratio. by 64%.
Investors shouldn’t expect huge growth in the coming years as hospitals continue to recover from workforce challenges in the current market and the continued economic and health fallout from the COVID pandemic. -19. However, it is still a reliable, high-dividend, high-yield stock that investors can buy at today’s bargain price.
3. Annaly Capital Management: Its 19.25% return is not worth the risk
Mortgage REITs are under enormous pressure at the moment in an environment of high inflation and rising interest rates. Annaly Capital Management (NLY 2.19%) is a unique mortgage REIT, as it does not originate loans for commercial or residential properties. Instead, it buys existing mortgages, mostly mortgage-backed securities (MBS) that are backed by the federal government (think Fannie Mae Where Freddie Mac loans).
Annaly Capital Management makes money from the difference between the interest it receives on the loans in its portfolio as well as the difference in price between the loans it buys and sells. It also derives revenue from its mortgage servicing arm. Rising interest rates are impacting Annaly’s cost of borrowing, reducing the profit margin on the interest it receives from the fixed rate loans it collects. Higher rates also mean less demand for new mortgages, something the company is relying on to grow its portfolio holdings.
The company increased its portfolio slightly in the third quarter, but interest rate pressure is definitely impacting its profitability with a net loss of $302 million. It was the company’s first negative quarter in more than a year. Its net interest spread, the profit it makes between its cost of borrowing and the interest earned, fell one percentage point in the third quarter to just 1.09%.
It’s recent 1 for 4 reverse stock split increased its dividend yield to 19.25% as share prices fell further. While a 19% yield is certainly attractive, it is unlikely to last long, as the REIT will likely adjust the next dividend payment to reflect the new number of shares and the new share price. Today’s tough market puts its dividend at risk for a decline in the near future. When it comes to ultra-high yielding dividend stocks, there are much safer options that can offer attractive returns without the risk.