Stocks have continued to rally this year. While that’s great for portfolio values, finding attractive new investment opportunities has become more difficult. That’s especially true for income-seeking investors since dividend yields fall as stock prices rise.
However, there are still some compelling income opportunities if you know where to look. For example, the average real estate investment trust (REIT) currently yields over 4%, roughly triple the S&P 500‘s dividend yield.
REITs have been under pressure in recent years due to higher interest rates, putting downward pressure on real estate values. That headwind should fade in the coming years as the Federal Reserve begins cutting rates, which makes the sector look like a wise choice right now. While lots of REITs look attractive, Agree Realty (NYSE: ADC), Mid-America Apartment Communities (NYSE: MAA), and Vici Properties (NYSE: VICI) are among those that stand out for their income and upside potential.
A massive growth opportunity
Agree Realty pays a monthly dividend that yields around 5%, partly due to the more than 25% slide in its stock price from its peak before interest rates started rising. The retail REIT has grown its payout at a 5.6% compound annual rate over the last 10 years, and that steady rise should continue.
The REIT focuses on owning freestanding properties net leased or ground leased to high-quality retail tenants. Those leases supply it with very stable rental income. It pays out less than 75% of its steady income in dividends. That provides a nice cushion while allowing it to retain cash to fund new income-generating retail property investments.
Agree Realty expects to invest about $600 million in new properties this year. It should have plenty of opportunities, as it partners with growing national and super-regional retailers that own most of their locations. Its existing tenants own over 165,000 locations that the REIT could acquire in future sale-leaseback transactions.
With less than 2,200 properties in its portfolio, Agree Realty has a long growth runway ahead. Add in its dividend and upside as interest rates fall and real estate values rise, and the REIT could generate strong total returns in the coming years.
Headwinds will soon become tailwinds
Mid-America Apartment Communities, or MAA, currently yields more than 4%. That high yield is partly due to the nearly 40% slump in its stock price over the past few years. Higher rates and increased apartment supply from several new development projects across the Sun Belt region have weighed on the residential REIT’s value.
However, those headwinds should fade over the coming years. The company expects to see a decline in new apartment completions in its markets later this year and into 2025. That should drive a quick rebound in rental growth rates.
Meanwhile, as other apartment developers are pulling back due to higher rates, MAA is ramping up its activities. The REIT has five communities under development, which it expects to complete over the next year and a half. It’s also planning to start four to six more developments over the next two years.
These growth drivers should enable the REIT to continue increasing its dividend. It has raised its payout for 14 straight years, including by 5% in late 2023.
Its rapid growth should continue
Vici Properties’ dividend yield is approaching 6%. A big driver of its higher yield is the roughly 20% decline in its share price from its recent peak due to higher interest rates.
While higher rates have weighed on its share price, they haven’t impacted its ability to grow. Vici Properties’ revenue rose 8.4% in the first quarter, while its adjusted funds from operations (FFO) increased by 10.3% (6.1% on a per-share basis).
The REIT, which focuses on experiential real estate, has continued to find compelling investment opportunities. For example, it recently agreed to fund up to $700 million in improvements to The Venetian Resort Las Vegas. It also agreed to finance a new Margaritaville Resort development in Kansas City. It has a strong balance sheet to continue securing new investment opportunities, which are abundant due to its strategic partnerships with operators of growing experiential businesses.
Vici Properties’ growing income should enable the REIT to continue increasing its dividend. Since 2018, it has delivered a 7.9% compound annual dividend growth rate, well above its peer group average of 2.2% during that period.
Growing income stream and upside potential
Lower interest rates have put a lot of pressure on REIT share prices in recent years. However, they haven’t slowed Agree Realty, MAA, or Vici Properties down too much. Because of that, they look like smart dividend stocks to buy, considering that rates should turn from a headwind to a tailwind in the coming months. That catalyst should combine with their attractive and rising dividends to enable these REITs to deliver strong total returns.
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Matt DiLallo has positions in Mid-America Apartment Communities and Vici Properties. The Motley Fool has positions in and recommends Mid-America Apartment Communities and Vici Properties. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy With $1,000 Right Now was originally published by The Motley Fool
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