Investing

Baird Dividend Portfolio Offers Big Yields, Safety and Solid Upside Potential

Lee Jackson

Published: May 18, 2017 8:20 am

Last Updated: January 12, 2020 11:54 am

Despite the constant chatter from the Federal Reserve and those on Wall Street anxious to see interest rates move higher, the reality is almost every uptick in yields brings in buyers, which in turn drives the yields back down. There are numerous reasons why, not the least of which is investors are somewhat nervous given the current developments domestically and on a global macro basis, and they see U.S. Treasury debt as the proverbial safe haven. Yields plunged yesterday as worried investors bought Treasury debt heavily.

A new research report from the Real Estate analysts at Baird updates the firm’s Common Stock Dividend Portfolio and makes some adjustments, adding two new companies while removing two. To make the list, stocks must meet this list of requirements that was in the research report:

The Baird Real Estate Research team provides a selection of nine dividend-enhanced common stocks each month for investors to consider. The criteria for consideration include Outperform-rated shares within Baird’s coverage; Average or Lower Risk suitability; a dividend yield at least 150 bps above the current 10-year Treasury yield; and an adjusted funds from operations (AFFO) payout ratio for 2017 under 100%.

Here we highlight the five highest yielding stocks in the portfolio and, again, all are rated Outperform by the analysts at Baird.

Medical Properties Trust

This stock may be offering investors the best value at current price levels. Medical Properties Trust Inc. (NYSE: MPW) acquires, develops and invests in health care facilities, and it leases health care facilities to health care operating companies and health care providers. The company also provides mortgage loans to health care operators, as well as working capital and other term loans to its tenants and borrowers.

With a growing portfolio and a versatile business model, the company continues to rank highly across Wall Street. The analysts noted that the company’s acute care hospitals rent coverage increased nicely, and the company attributed the increase to better cost controls and higher patient admissions.

Shareholders this real estate investment trust (REIT) are paid an outstanding 7.23% distribution. The Baird price target for the shares is $15, and the Wall Street consensus target is $14.09. The stock closed Wednesday at $13.28 per share.

Chesapeake Lodging Trust

This stock is trading at levels printed back in the fall and it may have substantial upside potential. Chesapeake Lodging Trust (NYSE: CHSP) is focused on investments primarily in upper-upscale hotels in various business and convention markets and, on a selective basis, select-service hotels in urban settings or other locations in the United States.

The company reported better than expected first-quarter results, and while it issued lower guidance for the current quarter, it maintained the outlook for 2017 that is currently in place. The company’s president and chief executive, James Francis, said this in the earnings release:

Although we still have not yet seen a meaningful increase in lodging demand from corporate customers, we remain cautiously optimistic that the current pro-growth political agenda will lead to an uptick in lodging demand in the quarters ahead.

Chesapeake Lodging investors are paid a very solid 7.05% distribution. Baird has a $26 price target for the shares, and the posted consensus target is $23.14. The shares closed most recently at $22.68 apiece.

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Apple Hospitality REIT

This is another hotel REIT that is offering solid upside and a great distribution. Apple Hospitality REIT Inc. (NYSE: APLE) invests in real estate, primarily in the lodging sector, in the United States. As of December 31, 2016, the company owned 235 hotels with an aggregate of 30,073 rooms located in urban, suburban and developing markets throughout 33 states. The company’s hotels included various brands, such as Hilton Garden Inn, Courtyard, Homewood Suites, Residence Inn, SpringHill Suites, TownePlace Suites, Fairfield Inn, Home2 Suites, Marriott, Embassy Suites, Hilton and Renaissance.

The company has grown extremely quickly, with its total assets jumping from $3.7 billion in 2015 to $5.0 billion last year. Top analysts are expecting big things out of Apple Hospitality Trust going forward, including a 26% rise in net income in 2017. That could mean an increase to the REIT’s monthly dividend, which was well-funded in 2016 by $1.76 per share in modified funds from operations – an important metric of REIT dividend safety.

Investors are paid a very solid 6.5% distribution. Baird has set its price objective at $20, which is the same as consensus target price. The stock closed most recently at $18.31 per share.

Kite Realty

This stock has been cut almost in half since last summer, and it offers good upside plus a big distribution. Kite Realty Group Trust (NYSE: KRG) invests in real estate markets of the United States. It engages in ownership, operation, management, leasing, acquisition, construction, expansion and development and redevelopment of operating retail properties, retail properties under development, operating commercial properties, parking garage, commercial property under development, parcels of land, shopping, dining and entertainment properties.

The company posted strong first-quarter results, though it maintained the current outlook for the rest of 2017. With outstanding metrics and solid cash flow, this is another company that could be increasing the distribution.

Investors in Kite Realty are paid a strong 6.6% distribution. The $24 Baird price target compares with the consensus target of $24.75. The shares closed most recently at $18.33.

Armada Hoffler

This company is trading at levels printed last fall and also offers good growth potential. Armada Hoffler Properties Inc. (NYSE: AHH) is engaged in developing, building, owning and managing institutional-grade office, retail and multifamily properties in various markets throughout the mid-Atlantic and southeastern United States. In addition to the ownership of its operating property portfolio, the company develops and builds properties for its own account and through joint ventures between the company and unaffiliated partners. It also provides general contracting services to third parties.

Note that the company recently completed a successful secondary stock offering, which raised a significant amount of cash.

Shareholders are paid a very nice $5.91 distribution. The Baird price target is $15. The consensus target is $15.08, and shares closed Wednesday at $12.86.

Investors need to remember that REIT distributions can contain return of principal. Given the size of these distributions, and the potential for some upside, the total return could come in at double-digit levels, which may be outstanding given the overall pricey stock market, which took a big hit yesterday.