Investing

3 Top REITs With 5%-Plus Yields to Bet Big On As Fed Enters Rate-Easing Cycle

Rich Duprey

Published: October 3, 2024 11:29 am

Real estate investment trusts (REIT) were one of the industries hit hardest by the Federal Reserve’s unprecedented interest rate hikes. The central bank raised rates a shocking 11 times in a little over a year.

That took the Federal Funds Rate from 0% to 5%, and then the Fed left it there under a “higher for longer” policy to slow the economy’s growth. From the time the central bank began raising interest rates until last fall when chatter about rate cuts began heating up, the S&P U.S. REIT Index plunged 25% compared to a 2% loss by the S&P 500.

However, REITs are starting to make a comeback. Over the past year, the REIT index is up 30%, right in line with the benchmark index’s 33% jump.

Although REITs became the market’s punching bag for Fed policies, it was an unwarranted assault. According to analysts at Janus Henderson Investors, while REITs saw their stocks suffer a massive devaluation, their earnings actually grew 18% over that same time frame. The industry was still healthy and profitable even as the perception of the capital intensive business got maligned.

Now that the tide is turning, REITs have become the top-performing sector in the S&P 500. Since June, the National Association of REITs says the industry has returned 16% versus a 1% gain by the index.

With the first interest rate cut by the Fed locked in and more to come this year and in 2025, the following three REITs could be among the best bets to buy now.

Key Points About This Article:

• REITs were hurt by the Federal Reserves monetary policy, which saw a “higher for longer” rate environment depress their stock valuations.
• Now that the central bank is entering a rate-easing cycle, REITs are rebounding and the three stocks below are among the best to capitalize on the new environment. 
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Realty Income (O)

The first REIT investors should consider buying today is commercial REIT Realty Income (NYSE:O), which focuses on single-tenant properties. Among its largest tenants are Walmart (NYSE:WMT), Dollar General (NYSE:DG), and Tractor Supply (NASDAQ:TSCO). It also began investing in data centers recently to capitalize on the explosion of opportunity created by artificial intelligence demand.

Realty Income operates on a triple net-lease basis, meaning the tenant, not the REIT, is responsible for the rent, insurance, maintenance and taxes on the property. And because it properties are typically single-tenant, there is less concern about a recession taking out a bunch of its occupants. Realty Income reports occupancy rates were at 98.8% at the end of the second quarter.

Realty Income pays its dividend monthly. It just announced a new increase in the payout, its 108th consecutive quarterly hike since listing on the NYSE in 1994. Its dividend currently yields 5% annually making the REIT a worthy addition to your portfolio.

Innovative Industrial Properties (IIPR)

Medical marijuana REIT Innovative Industrial Properties (NYSE:IIPR) doesn’t actually grow or sell cannabis, but just owns the properties on which such companies sit. There are only two REITs focused on the cannabis market and Innovative Industrial Properties is the largest.

It owns 108 properties across 19 states with some 9 million rentable square feet. IIPR also operates on a triple net lease basis and has 95.6% of its property leased. They are also long-term contracts averaging 14.4 years.

Innovative Industrial has something of a captive audience. Because cannabis companies are prohibited from accessing traditional lending sources due to marijuana’s classification as a Schedule I drug, they come to Innovative Industrial for financing. 

Some investors are concerned that the reclassification of cannabis as a Schedule III drug will undermine IIPR’s growth potential. While medical marijuana companies may have more choices open to them from the move, banks are still likely to be leery  of lending to them due to anti-money laundering and racketeering laws. Further, pot stocks will likely prefer working with a company that understands their industry.

Innovative Industrial recently raised its payout to $7.60 per share. It yields 5.7% annually with an adjusted funds from operation (AFFO) payout ratio of 83%. As REITs are required to payout 90% or more of their profits as dividends, IIPR’s payout is secure.

VICI Properties (VICI)

The last REIT to consider is casino REIT VICI Properties (NASDAQ:VICI), another REIT that is one of just two focused on its particular industry. By buying VICI stock, you’re betting on the continued growth of Las Vegas.

VICI Properties owns the land beneath the casinos of Caesars Entertainment (NASDAQ:CZR) from which it was spun off in 2017. It also owns the real estate for MGM Resorts (NYSE:MGM) MGM Grand and Apollo Global Management‘s (NYSE:APO) Venetian Resorts. In total, VICI’s portfolio has 54 gaming properties and 39 other “experiential properties” in the U.S. and Canada.

The number of visitors to Las Vegas continues to grow with the Las Vegas Convention & Visitors Authority reporting a 2.4% increase in August from last year. While convention attendance was down slightly year-over-year, occupancy is up as are average daily room rates.

VICI Properties has steadily increased its dividend since its was spun off, and has grown the payout at a healthy 8% compounded annual growth rate for the past five years. It announced a 4.2% increase just last month.