Did Janet Yellen Green-Light Investors to Buy REITs?

Throughout 2015, real estate investment trusts, or REITs, have been out of favor with investors, on fears of rising interest rates. Two in particular that have struggled are Realty Income (NYSE: O) and Welltower Inc. (NYSE: HCN). Realty Income and Welltower, formerly known as Health Care REIT, are down 1% and 8%, respectively, year-to-date.
But now that the Federal Reserve has once again postponed its plans to raise interest rates, investors may return to high-yield REITs like Realty Income and Welltower. The beauty of these strong businesses is that even when the Fed does finally get the first rate hike over with, they will continue chugging along, pumping out their 4% to 5% dividend yields.

Time to Buy REITs?

Investors have sold these two REITs this year, because of the threat of rising rates and the effect that will have on company balance sheets. And it is true that REITs are rate-sensitive business models. They utilize debt in their capital structures, as they need to borrow money to buy properties, which are then lent out to their tenants.
But that does not mean they have too much debt, or that their businesses are in danger of serious deterioration if, and when, interest rates begin to rise. Rather, their business models are very strong, and should actually be viewed as a reason to like these companies.
Realty Income owns more than 4,400 properties rented under long-term leases. These properties are primarily rented to retail tenants that come from various industries such as distribution centers, health and fitness facilities, and drugstores. In all, Realty Income’s tenants span 47 different industries, which is excellent diversification.
An added bonus of Realty Income’s business model is that it engages in “net” leases, meaning the tenant is responsible not just for paying rent every month, but also for covering the major operating expenses such as taxes, maintenance and insurance.
As a result, its profits consistently grow over time. For example, Realty Income’s funds from operations, or FFO, rose 12% over the first half of the year. FFO is a financial metric more commonly used to analyze REITs than GAAP earnings per share, as it excludes a number of one-time items that artificially suppress REIT earnings.
For its part, Welltower acquires and leases health-care related properties, such as senior housing, post-acute care and outpatient medical facilities. In all, it owns more than 1,400 properties.
The stock is down this year, but the underlying economics of its industry remain favorable, thanks to the aging population in the United States. Welltower should see continued demand for their services as a result of tens of millions of people entering retirement each year.
Welltower has grown FFO by 3% over the first six months of 2015, year over year, and expects 3% to 5% growth of FFO for the full year. This will be plenty of growth to continue growing its dividend at a modest rate.

REITs With Rock-Solid Dividends

Both Realty Income and Health Care REIT pride themselves on their track records of delivering steady dividend payments without interruption. Realty Income bills itself as the “Monthly Dividend Company” because it pays its dividend every month, which allows its investors to compound their wealth even faster than they would with traditional quarterly distributions.
Realty Income has made 543 consecutive monthly dividend payments, and has raised its monthly dividend 82 times.
Meanwhile, Wellpoint raised its dividend by 4% earlier this year. It has paid 177 consecutive quarterly dividends, a streak amounting to more than 44 years.

Don’t Fear a Rate Hike

With such long track records of consistently paying dividends, it is clear that Realty Income and Wellpoint have stood the test of time. They have continued to pay, and increase, their dividends for decades. This was even true during periods of very high interest rates, which is why dividend investors should not avoid these stocks simply at the prospect of a quarter-point increase in the federal funds rate.
Realty Income and Wellpoint remain highly attractive picks for dividend investors.

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