Real estate investment trusts (REITs) typically offer high-yield dividends. Currently, the average REIT dividend yields about 3%, which is well above the S&P 500's roughly 1.2% yield.
However, some REITs offer even bigger dividend yields. Here's a closer look at some of the biggest REIT dividends that income-focused investors might want to put on their watchlist since there's a reason for their big-time yields.
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Gladstone Commercial (GOOD +1.58%): 6.9% yield
Gladstone Commercial is a diversified REIT that primarily owns office buildings and industrial facilities. It also has some retail properties and medical office buildings. This diversified portfolio generates very stable cash flow. The company's funds from operations (FFO) per share has been between $1.53 to $1.58 over the last five years. That helps support the company's $0.125275 per-share monthly dividend.
If there's one knock against Gladstone, it's the REIT's high dividend payout ratio. With its monthly dividend adding up to an annualized $1.5033 per share, it pays out more than 95% of its cash flow. Because of that, it's not retaining much money to grow. As a result, it needs to issue stock, which is why its FFO per share has barely increased in recent years, even though its revenue has steadily risen as it acquires new assets. It needs to start growing FFO per share and improving its dividend payout ratio to make it worth buying.
Global Net Lease (GNL +2.45%): 11% yield
Global Net Lease is another diversified REIT with a high dividend payout ratio. The company also primarily owns offices and industrial buildings, along with some retail facilities. This diversified portfolio helps the company produce very stable cash flow.
The rub is that the REIT has paid out more than 100% of its cash flow in dividends over the last 12 months. On a more positive note, its payout ratio improved to 91% in the third quarter, thanks to higher cash flow from recent acquisitions. If it can continue growing its FFO per share, that would put its enticing dividend on a firmer foundation.
Office Income Properties Trust (OPI +140.00%): 9% yield
Office Income Properties Trust, as the name implies, is an office-focused REIT. That focus on office has weighed on the company, especially given the significant amount of leases it has expiring over the next few years. It owns a lot of older properties in less desirable markets, which could impact occupancy and lease rates in the future.
On a more positive note, the company has a very conservative dividend payout ratio. It's currently at 69%, which is below its 75% target. That's enabling it to retain more cash to complete its capital recycling strategy of selling older properties in less desirable markets and buying higher quality ones in stronger markets. If it can execute that strategy and get past some of its near-term lease expirations, it would help put its attractive payout on a firmer foundation.
Omega Healthcare Investors (OHI 0.54%): 9.6% yield
Omega is a healthcare REIT focused on skilled nursing facilities. On the one hand, investors have concerns about these properties due to the potential for legislation that could change their business model. However, these facilities play an important role in the healthcare industry, which lessens the risk of sweeping changes.
Another issue weighing on Omega is the financial health of some of its tenants. For example, $16 million of the revenue it recognized in the third quarter came from applying security deposits, letters of credit, and other collateral from two of its tenants. Once it exhausts these sources and these tenants are still unable to pay their rent, it will impact its FFO and potentially the dividend. Because of that, Omega needs these tenants to start paying rent to ensure the long-term sustainability of its dividend.
Sabra Health Care REIT (SBRA +1.41%): 9.1%
Sabra is a healthcare REIT focused on senior housing. The pandemic has impacted these properties, which has weighed on Sabra's results. Like Omega, it has had to draw on a letter of credit from a tenant that has struggled to pay its rent. In addition, occupancy has declined at some of its managed properties, impacting its net operating income.
The company's portfolio needs to continue to recover from the pandemic's impact to put its payout on firmer ground. Omega also needs to start receiving rental payments from its struggling tenant or find a workable solution, such as an amendment that helps both parties.
Too much risk right now
These five REITs offer eye-popping yields in the current environment. However, there's a reason for that. They're all facing headwinds and uncertainty that could put their payouts at risk. Because of that, investors should put these REITs on their watchlist, for now, to see if they sort out their issues.
