Time to Buy: 3 REITs to Build Income

Time to Buy: 3 REITs to Build Income

Over the last three weeks, the S&P 500 has dropped a little over 4%. With the uncertainty regarding debt ceiling negotiations in Washington and the possibility of a default looming, the market certainly could fall further. But dividend investors might want to stand up and take notice.

After all, dividend stocks have been proven to be less volatile over time, with an income buffer acting as good protection in down times. And right now, we have a chance to pick up some dividend-paying names at a reasonable price.

Think of REITs, or real estate investment trusts, as the landlords of various businesses. These trusts own the land and collect rent from tenants, often monthly. Today, REITs are one of the most beaten-up asset classes. Many of them are off double-digits from their peaks just this year and are now paying a nice dividend.

REIT bargain bin
Home Properties
is one of the best apartment operators in the country. Its return on invested capital, for example, is among the highest of all apartment REITs at 7% this year. Add to that steadily increasing rent as well as a juicy dividend yield, and we have a recipe for great returns over time.

Home is a turnaround artist of sorts: Scoping out safe neighborhoods in East Coast metropolitan areas with good schools, transportation, and amenities for lower grade apartment communities ripe for renovation. The end result is higher rents on renovated communities and a great return on capital. Not to mention an economic moat. After all, there's only so many good suburban neighborhood apartment communities out there.

Right now, Home trades at roughly 10 times adjusted funds from operations. As for the dividend, it currently yields 4.85% and is very well covered with a payout ratio of under 65%. This year, Home raised its dividend by 6%. Expect something similar next year. Now may be a good time to wade in.

With a yield of 6.6% at 10 times adjusted funds from operations, entertainment REIT EPR Properties is also a bargain. EPR is fairly diversified, yet concentrated enough to be an expert in its field. For example, EPR has over 250 tenants; however, 72% of revenue comes from entertainment, mostly theaters. Another 13% of revenue comes from recreation like golf courses, water parks, bowling, and a few others. The last 15% comes from private charter schools.

EPR's dividend is pretty well covered, at 82% of projected 2013 funds from operations. This year, the dividend grew by 4%. Not too shabby, especially considering the high yield. Even better, return on invested capital is in the top 25th percentile for REITs of its kind. One reason for its low price is because entertainment is not considered a necessity, so this name does have some economic sensitivity.

But one name with less sensitivity is Realty Income . Where EPR is a specialty REIT, Realty is focused on the safety of broad diversification in the retail space. Over the last few years, this trust has done a great job in shifting to tenants with good credit quality, in areas unaffected by the rise of e-commerce, and finally those tenants targeting more well-off customers less affected by this tough economy. In essence, Realty has moved to higher ground.

This respected and well-established REIT trades at 16.5 times funds from operations. A bit more expensive than the other two, but still reasonable. For the first half of this year, the coverage ratio was 85%. Considering that this is a less economically sensitive REIT with everyday services people need, 85% is a pretty secure ratio.

While this year's 20%+ dividend raise was due to an acquisition and will not be repeated next year, Realty has raised its dividend quarterly 64 consecutive times and should continue doing so. Right now, it yields a generous 5.5%.

Foolish bottom line
Yes, it's scary out there right now. But dividend yielding stocks represent peace of mind. During difficult times, these names drop less because the income puts a floor under that price. And right now, some of the best REITs are very reasonable. Some are just plain cheap. The three names above will provide generous yields that can grow over time.

More high-yielding stocks
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article Time to Buy: 3 REITs to Build Income originally appeared on Fool.com.

Casey Hoerth owns shares of Realty Income. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published