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Innovative Industrial Properties(IIPR-N)
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2 Ultra-High-Yield REIT Stocks to Buy Hand Over Fist, and 1 to Avoid

Motley Fool - Wed Jul 12, 2023

There's nothing more likely to catch a dividend investor's attention than a big, juicy dividend yield. But yield alone isn't enough to make a stock worth buying. You need to dig in to understand the story behind the stock ... and its dividend yield. After all, a high yield backed by a dividend that gets cut isn't really a great opportunity.

Here's a look at why Innovative Industrial Properties(NYSE: IIPR) and W.P. Carey(NYSE: WPC) are both worth buying today, but Annaly Capital Management(NYSE: NLY) probably isn't.

A REIT that's big and well supported

Innovative Industrial Properties largely owns marijuana grow houses. The pot industry attracted outsized investor attention a few years ago but has since fallen out of favor. The burgeoning industry saw a lot of early entrants and it's now in something of a shakeout stage.

The company's stock has fallen around 75% from its 2021 highs. One key reason for this is that the real estate investment trust (REIT) has been dealing with some troubled lessees. That makes sense, given the industry shakeout.

IIPR Chart

Data by YCharts.

So far, however, management appears to be dealing reasonably well with the headwinds. For example, it collected 98% of first-quarter 2023 rents. Adjusted funds from operations (FFO) increased 10% year over year in the quarter, and the adjusted FFO payout ratio was a solid 80%.

There's some room for adversity before the dividend would be at risk because the company's debt-to-equity ratio is just 0.15. Given the balance-sheet strength, there's still plenty of room for acquisition-led growth.

By comparison, Realty Income(NYSE: O), a REIT most investors consider very conservative, has a debt-to-equity ratio of 0.65. That suggests the huge 9.9% dividend yield on offer here looks pretty secure.

A REIT that deserves the designation "old reliable"

Realty Income comes into play again with the next featured stock, W. P. Carey. They have some similarities, including the use of the net-lease approach and globally diversified portfolios. However, Realty Income's dividend yield is 5.1%, while W. P. Carey is offering investors a far more attractive 6.3%. You can find higher-yielding net-lease REITs out there, but it's hard to match what W. P. Carey offers as a business.

For starters, W.P. Carey has one of the most diversified portfolios in the REIT industry. Geographically, it generates around 38% of its rent from outside of the United States. Within its sectors, it provides exposure to industrial (27% of rents), warehouse (24%), office (17%), retail (17%), and self-storage (5%) properties, with a fairly large "other" category rounding things out to 100%. Basically, it can pivot to wherever the best opportunities are at any given time.

But the real attraction here is that W. P. Carey has increased its dividend annually since its initial public offering in 1998. That's roughly a quarter century and speaks to the company's successful execution.

A big yield backed by a diversified portfolio that's run by a management team with a history of success? What's not to like?

The dividend for this REIT is falling again

Meanwhile, Annaly Capital's dividend history is the big reason to avoid its huge 13.5% dividend yield. There's no question that the massive yield is tempting, but the dividend has been heading steadily lower for a decade. It was just cut again in March.

NLY Chart

Data by YCharts.

The reason the yield is so high is because the stock tends to fall right along with the dividend, as the graph above shows. If that isn't enough to dissuade you from buying Annaly Capital, then consider that it's a mortgage REIT. This is a very complex business that involves buying mortgages that have been pooled into bond-like securities and, often, uses a fair amount of leverage in an effort to boost returns.

If you want to buy a mortgage REIT, you'll need to do more homework on the sector because it's very different from property REITs, which are pretty simple to understand. Ongoing dividend cuts and a complex business model, however, should be more than enough to dissuade most dividend investors from owning this REIT.

Go with success

At the end of the day, Innovative Industrial's yield is high because the marijuana industry is in the midst of a shakeout. But the high-yield REIT is holding up very well and has the financial strength to deal with some adversity. W. P. Carey has a generous yield and a reliable dividend, backed by a very diversified portfolio.

Both companies are worth adding to your portfolio today. Annaly Capital, however, has a terrible dividend history and a complex business model, which should keep most dividend investors on the sidelines.

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Reuben Gregg Brewer has positions in Realty Income and W. P. Carey. The Motley Fool has positions in and recommends Innovative Industrial Properties. The Motley Fool recommends Realty Income and W. P. Carey. The Motley Fool has a disclosure policy.

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