The stock market has taken a nasty tumble this week. Stocks have sold off because the tariffs levied by the Trump administration were much higher than the market feared. Many economists worry they could spark a trade war that could ignite a global economic slowdown.
However, there is at least one silver lining to all the market turmoil: The yield on U.S. Treasury bonds has declined. The 10-year note’s yield has fallen below 4%, well off its peak above 4.75% earlier in the year.
The 10-year rate is a key benchmark for the real estate sector. As it falls, the value of commercial real estate tends to rise. It also makes it much cheaper to borrow money to fund new real estate investments and refinance existing debt. Because of that, the market turmoil could give real estate investment trusts (REITs) a big boost.
Here are three low-risk REITs to consider buying amid the market turmoil.
Realty Income
Realty Income (O -3.42%) owns a globally diversified portfolio of commercial real estate (retail, industrial, gaming, and other properties). It net leases these properties to many of the world’s leading companies. Those net leases provide it with very stable income because tenants cover all operating costs, including routine maintenance, real estate taxes, and building insurance.
The REIT pays out about 75% of its stable cash flow in dividends (5.7% current yield). It retains the rest to invest in additional income-producing properties. Realty Income also has one of the strongest balance sheets in the sector, giving it additional flexibility to invest in income-generating properties.
Despite its financial strength, higher rates have constrained its ability to raise additional capital from investors to fund accretive acquisitions. For example, it invested less than $3.9 billion last year and initially only plans to invest $4 billion this year. That’s well below its investment level before rising rates took full effect ($6.4 billion in 2021, $9.5 billion in 2022, and $9 billion in 2023). The decline in the 10-year should lower the REIT’s cost of capital, allowing it to ramp up its investment volume and grow faster.
W. P. Carey
W. P. Carey (WPC -3.80%) also owns a globally diversified real estate portfolio (industrial, warehouse, retail, self-storage, and other properties) net leased to high-quality tenants. The stable cash flow from those leases supports its high-yielding dividend (5.9%).
The REIT grows that payout by investing in additional income-generating properties. However, “Given the uncertainty in the broader market…particularly over the direction of interest rates and other macroeconomic factors,” commented CEO Jason Fox in the REIT’s fourth-quarter earnings report, the company offered conservative investment guidance to start the year. It expects to invest between $1 billion and $1.5 billion this year.
The CEO noted, “We can fund our investments this year without needing to access the equity market, achieved through accretive sales of noncore assets — including self-storage operating properties — which should generate a meaningful spread to our net lease investments.”
However, with interest rates improving, the REIT should be able to raise additional capital at attractive costs. That would allow it to ramp up its investment volume and grow even faster.
EPR Properties
EPR Properties (EPR -4.06%) owns a portfolio of experiential real estate (movie theaters, eat-and-play venues, attractions, and other properties). It net leases these properties to companies that operate the experiences. Those leases provide it with very stable income to pay its 7.7%-yielding dividend.
The REIT estimates it can self-fund $200 million to $300 million of new property investments this year with post-dividend free cash flow, noncore property sales, and borrowings on its credit facility. At that rate, it can grow its cash flow per share by 3% to 4% per year while delivering a similar dividend growth rate (it recently hiked its payout by 3.5%).
Like most REITs, higher interest rates have increased its cost of capital. However, with rates falling, EPR Properties could tap the capital markets to raise additional money to ramp up its investment rate and grow even faster.
Rock-solid income streams with rate-driven upside potential
Realty Income, W.P. Carey, and EPR Properties pay high-yielding dividends supported by their income-generating properties. The REITs produce enough cash after paying dividends to grow their portfolios and dividends, albeit relatively slowly.
However, with rates falling, these REITs could ramp up their investment volume this year and grow even faster. That could enable them to produce higher total returns in the future, making them look like compelling dividend stocks to buy amid the current tariff-driven market sell-off.
Matt DiLallo has positions in EPR Properties, Realty Income, and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
