The big attraction that investors have to Annaly Capital(NYSE: NLY) is its huge 13.2% dividend yield. That's an impressive number, but the dividend backing it has been cut multiple times over the past decade. If you buy Annaly thinking that you can live off the income, you might end up suffering a "pay cut" if history is any guide. It would be better to take a lower yield from a more reliable real estate investment trust (REIT), such as Federal Realty(NYSE: FRT), Universal Health Realty Trust(NYSE: UHT), or NNN REIT(NYSE: NNN). Here's a quick look at each.
1. Federal Realty is the king of the REIT sector
While Annaly stands out for its lofty yield, Federal Realty stands out for its impressive dividend streak. It is a Dividend King with more than five decades' worth of annual dividend increases behind it, the longest such streak in the REIT sector. However, Federal Realty is unique in other ways as well. Although its focus on strip malls and mixed-use projects isn't unusual, it only owns around 100 properties. Most of its closest peers own far more (many own multiples of that figure). Federal Realty basically focuses on quality over quantity.
This is not a small issue, noting that Federal Realty operates in more densely populated areas than its peers, and those areas have more wealthy residents. Moreover, with a small portfolio, the retail-focused REIT tends to pay extra attention to redevelopment efforts at its properties, ensuring they are at the top end of the options where they compete. At the end of the day, Federal Realty properties are the type the retailers want to be in, and consumers want to shop at. The only problem is that the shares are usually afforded a premium valuation. Still, the current 4.2% dividend yield is near levels seen during the COVID-19 pandemic and the Great Recession. It might be worth a look for investors who prize dividend consistency.
2. Universal Health Realty is a high-yield snail
Universal Health Realty owns exactly what its name implies: healthcare assets. The portfolio is fairly small, with just 75 or so properties. It is externally managed by Universal Health Services(NYSE: UHS), which is also one of its largest tenants. This relationship does create some potential issues around corporate governance and trust, but that is offset by the REIT's 38 consecutive years of annual dividend increases.
The big draw here is the yield, which sits at roughly 6.8%. The problem is that you can't expect much in the way of dividend growth, given the average annualized increase of just 1.4% over the past decade. But if you care more about current income than dividend growth, that might be just fine by you, especially considering that the yield is currently near decade highs.
3. NNN builds relationships
Last up is NNN REIT, which used to be known as National Retail Properties. This REIT operates single-tenant retail properties and uses a net lease approach. Net leases require tenants to pay for most property-level costs, which helps to reduce the REIT's expenses and the risk associated with things like inflation. Although any single property with just one tenant is a high risk, spread across a large portfolio, the net lease model is fairly low risk. NNN REIT's 3,500 or so locations make it one of the largest in the sector.
The current dividend yield of 5.1% is near the high end of the yield range over the past decade. The dividend has been increased each year for 34 years. But what really sets NNN REIT apart is that it works hard at fostering strong relationships with its tenants. To that end, roughly 70% of its acquisitions are relationship-based, meaning that the REIT is growing along with its tenants in a symbiotic relationship that clearly benefits investors who love dividends.
Look beyond the yield
It's easy for a dividend investor to get caught up in dividend yield figures. However, there are many other factors you'll want to consider. For example, Annaly's high yield has to be couched in the fact that it is a serial dividend cutter. This is why most investors will be better off looking at serial dividend increasers like Federal Realty, Universal Health Realty Trust, and NNN REIT.
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Reuben Gregg Brewer has positions in Federal Realty Investment Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
