REITs, or real estate investment trusts, have a reputation for income and consistent payouts. By law, these companies pay out 90% of their taxable income as dividends, making them a, shall we say, interesting alternative to your run-of-the-mill Dividend Kings and Aristocrats. Some REITs belong to both lists. With such high dividend yields—reaching double-digit percentages in some cases—prudent investors might wonder: what's the catch?  

Several factors influence REIT stocks, including macroeconomic factors, real estate or equity market volatility, declining property values, and overexposure to certain property types or trends. Between March 2022 and July 2023, however, higher interest rates were the biggest driver of REITs underperformance. Indeed, higher-for-longer interest rates could certainly affect a company's bottom line.

Still, high dividend yields won't last forever—especially if the Fed reduces interest rates in 2024. Moreover, investors can't just pick any REIT. They should complement their investments with due diligence and other metrics, such as analyst ratings, to ensure they get the most out of them. 

How I Picked The Following 3 REITs

Barchart.com offers personalized watch lists that you can use to keep tabs on different stock categories. I have a prepared list of REITs, which I filtered through Screener using two different qualifications: annual dividend yields and current analyst ratings. 
 

And then, I organized the results based on dividend yield. These were the results:

As you can see, I’ve chosen the highest possible values for both categories, ensuring we get the best dividend yields - and highly rated REITs. The stocks on this list are in ascending order based on dividend yield. 

Considerations For REITs

REITs are a class of their own, distinctly different from regular companies and their stocks. For one, REITs don’t keep most of their earnings. 

When evaluating REITs, checking their book value per share (BVPS) is important. This amount represents the company's worth, including all real estate and mortgage assets after liabilities. 

BVPS tells us how much each shareholder would get should the company be liquidated on the spot. (Please note that this value is derived from “book” valuations, which do not represent the actual selling price of the assets in case of liquidation. Still, they’re as close as we can get.)

So, a good way to assess a REIT’s value is to check its book value per share against its current stock price. The lower the stock price relative to its BVPS, the more attractive it looks. 

Most REITs also present adjusted funds from operations (AFFO) in their reports. This value is my favorite indicator of the company’s capability to pay dividends. I look for AFFOs higher than current annual payouts. 

Analysts consider these metrics when reviewing REITs, which would have factored into their strong buy recommendations for the following companies. 

CTO Realty Growth (CTO)

Unlike the other two on this list, which focus on residential mortgages and investments, CTO Realty Growth owns and operates retail properties in the United States. According to its latest investor presentation, the company owns and operates 3.7 million square feet of retail space. 

CTO stockholders can expect a 38-cent quarterly dividend or a $1.52 annualized payout for 2024. This translates to an 8.97% yield. 

Meanwhile, the company’s FY'24 AFFO guidance sits between $1.70 to $1.78, comfortably above its current dividend payout. 

CTO stock also has a strong buy recommendation with a high target price of $20.

Redwood Trust (RWT)

Redwood Trust is a diversified specialty finance company that offers residential credit and mortgage lines to consumers and investors. The company also has an investment segment that handles organic investments based on its own operations. 

Redwood also operates RWT Horizons, which provides early-stage venture capital. 

According to the company’s Q4’23 report, GAAP book value per common share ended at $8.64. This represents a slight 1.5% drop from the previous quarter. 

In better news, the company’s annualized return on common equity (ROE) reached 7.3%, improving from -12.3% last quarter. 

Meanwhile, RWT stock pays 16 cents per share per quarter, or 64 cents annualized, reflecting a 10.05% yield based on current prices. The stock also has a strong buy recommendation with a high target price of $9. 

Cherry Hill Mortgage Investment (CHMI)

Cherry Hill Mortgage Investment Corp might be for you if you're looking for a potential comeback story. The company invests in residential real estate in the US. In addition to typical real estate, the company’s diversified portfolio includes mortgage servicing rights (MSRs) and residential mortgage-backed securities (RMBS). 

As of the end of 2023, Cherry Hill has more than $1.4 billion in investable assets and $4.53 book value per common share. 

In Q4’23, the company experienced a massive loss in derivatives, servicing-related assets, and RMBS. Fortunately, unrealized RMBS gains partially offset this loss, leading to a diluted EPS of 24 cents per share. 

As for dividends, the company has been consistent with its dividend payouts in actual payments, if not dollar amounts. Dividend rates have declined since 2018, with the latest quarterly payout pegged at 15 cents per share. 

Still, this represents a 60-cent forward dividend rate, reflecting a 17.14% yield. 

Additionally, B.Riley Security ranks CHMI stock as a Strong Buy with a high target price of $5.00. However, that's only one analyst. Investors with a higher risk appetite may consider Cherry Hill as a possible target.

Final Thoughts

REITs can be good portfolio additions for income investors. They are also historically less volatile than stocks. However, they can be sensitive to things outside the company’s control. 

Furthermore, sudden market downturns have a long-term effect on their stock price, and since most investors are buying and holding them, the prices don’t often experience significant upswings. Investors should evaluate their portfolio and investing horizons to see if REITs suit them.