As the year 2024 approaches, investors and financial experts are closely watching for significant changes in the economic landscape. One of the most anticipated shifts revolves around the Federal Reserve’s expected pivot from its prolonged rate-hike campaign. After a period of consistently raising interest rates to combat stubborn inflation, policymakers have indicated a potential change in direction following the December meeting. The possibility of three quarter-point interest rate cuts in the coming year has caught the attention of both seasoned investors and newcomers alike.
Dividend-Paying Stocks and Their Prospects in a Changing Interest Rate Environment
The impending shift in the Federal Reserve’s stance on interest rates brings good news for dividend-paying stocks. These stocks, which have faced challenges in recent times due to high interest rates and surging bond yields, might be in for a revival. In particular, Real Estate Investment Trusts (REITs) stand to benefit from this potential policy change, given their reliance on debt for expanding their real estate portfolios.
The Allure of High-Yield Investments in a Low-Interest Rate Scenario
In an environment with lower interest rates, high-yield investments, such as REITs, become increasingly appealing to investors. Reduced interest rates lower borrowing costs, potentially boosting profits for REITs. Additionally, the high dividends that REITs offer can provide a stable income stream, making them an attractive choice for investors in a time when returns on other investments are diminished.
High-Yield REITs to Consider in the Current Economic Climate
In light of the potential benefits that REITs may reap from the Federal Reserve’s pivot, let’s delve into three high-yield REITs that investors may want to consider: Innovative Industrial Properties Inc. (IIPR), Apple Hospitality REIT Inc. (APLE), and Redwood Trust Inc. (RWT).
Innovative Industrial Properties Inc. (IIPR): Navigating the Cannabis Industry with Success
IIPR is a specialized REIT that has been making significant strides in the cannabis industry. It primarily leases industrial and some retail space to state-licensed operators. IIPR’s impressive portfolio boasts 108 properties leased to 29 tenants across 19 states, covering a vast 8.86 million rentable square feet.
Notably, IIPR has been consistently increasing its dividends for five consecutive years, currently paying out $1.82 quarterly, resulting in an attractive yield of 7.31%. Furthermore, the company has exceeded analysts’ earnings estimates for four consecutive quarters.
Despite a modest year-to-date stock performance of 2.6%, IIPR is reasonably priced at 11 times adjusted forward funds from operations (FFO), representing a discount to the real estate sector median. Analysts hold a moderately bullish outlook on IIPR, with a consensus target price of $107.80, implying a potential 7% upside from the current price.
Apple Hospitality REIT Inc. (APLE): A Resilient Hotel-Focused REIT
In 2023, APLE has been regaining its momentum. This REIT focuses on upscale U.S. hotels, with a portfolio heavily skewed toward renowned brands like Hilton and Marriott. APLE has witnessed growth in occupancy, revenue, and earnings compared to the previous year, which has contributed to a 9% year-to-date increase in its stock price.
The economic and travel recovery, coupled with APLE’s strategic brand mix and locations, has bolstered its resilience. APLE maintains a strong balance sheetThe balance sheet is a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and equity. More and cash reserves, operating efficiently to optimize capital deployment.
On the earnings front, APLE has met or exceeded analysts’ bottom-line estimates in three out of the past four quarters. With shares trading at 12.9 times forward AFFO, they remain undervalued compared to the real estate sector median. For fiscal year 2024, Wall Street anticipates 4.3% growth in both revenue and FFO.
APLE recently expanded its upscale footprint by acquiring a 192-room Hilton Embassy Suites in the Salt Lake City metro area for $36.8 million. The company also declared a monthly dividend of $0.08 per share, along with a special $0.05 dividend for shareholders in January, offering a forward dividend yield of 5.67%.
Of the eight analysts tracking APLE, four recommend a “strong buy,” and four suggest a “hold.” The average price target stands at $18.33, reflecting an 8.3% potential upside from current levels.
Redwood Trust Inc. (RWT): Managing a Diverse Real Estate Portfolio
RWT is a REIT that manages a diverse portfolio of residential and commercial mortgage-backed securities, loans, and other real estate assets. In 2023, RWT experienced a somewhat uneven performance, with its stock up approximately 6.4% year-to-date, lagging behind the broader equities market.
RWT’s Q3 results fell short of expectations on both revenue and earnings, resulting in a year-over-year decline of 5% in GAAPIn the complex world of finance and corporate accounting, one indispensable framework reigns supreme—Generally Accepted Accounting Principles, commonly known as GAAP. GAAP serves... book value per common share as of September 30. However, this figure remains higher than current trading levels and the average analyst price target.
RWT currently offers a quarterly dividend of $0.16, translating to an annual yield of 8.58%. Looking ahead to fiscal 2024, analysts anticipate robust bottom-line growth of 43.6%, coupled with a 19% increase in revenue.
The consensus target price of $8.30 for RWT implies an upside potential of 11.6% from its current valuation. Out of the ten analysts covering RWT, seven recommend a “strong buy,” one suggests a “moderate buy,” and two recommend a “hold.”
A Promising Outlook for High-Yield REITs in 2024
Bottom-line: As we approach 2024, the evolving economic landscape and potential changes in interest rate policy by the Federal Reserve have brought high-yield REITs into focus. IIPR, APLE, and RWT stand out as promising options for investors seeking stable income and potential growth in the coming year. While each REIT has its unique characteristics and opportunities, they all present compelling investment prospects in the evolving economic landscape.
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This content is provided for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor.
