5 real estate stocks to buy for dividend income

These real estate stocks have dividend income and potential growth to hedge the inflation rate.

  • By Stavros Georgiadis,
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These real estate stocks to buy offer investors ample dividend income to fight off the inflationary pressures in the economy.

  • Annaly Capital Management (NLY): Its beat on both top and bottom lines in Q1 2022 looks very promising.
  • Chimera Investment (CIM): A decline of 36% in 2022 makes it a bargain now for a very attractive dividend yield.
  • Ellington Financial (EFC): It’s currently trading below its estimated book value per share.
  • Starwood Property Trust (STWD): Moderate losses of nearly 7% in 2022 show strength and the dividend yield matches the latest U.S. inflation rate.
  • New York Mortgage Trust (NYMT): A penny stock with a dividend yield of more than 13% is hard to ignore for passive dividend income.

One of the best ways to earn dividend income is via real estate stocks — and more specifically, real estate investment trusts (REITs). REITs are publicly traded companies that own and operate income-producing real estate. Investors can participate in the real estate sector through REITs without the knowledge and expertise required to invest directly in real estate.

REITs are great answers to popular investing questions such as how do you earn dividend income, and generally they can be pointed to as examples of good dividend income.

REITs have several requirements imposed on them by the Securities and Exchange Commission, and one of them is that they are required to pay out at least 90% of their taxable income as dividends. Most of the REITs in this list of real estate stocks to buy for dividend income offer a dividend yield that is more than the 41-year-high 8.5% inflation rate in March for the U.S. economy.

These REITs are long-term investments that pay out consistent dividend income, but this does not mean that they do not offer the opportunity for active trading. On the contrary, all these stocks have followed the U.S. stock market decline and have losses year-to-date.

Passive investors will do well to consider these real estate stocks to buy, since they solve one big problem associated with owning stocks. Attractive dividend income can turn a loss in the stock price into a small gain in total return, whereas with non-dividend stocks, you’re stuck with the loss. The prices below are as of the open on May 18.

Annaly Capital Management

Dividend Yield: 13.5%

As the first of our real estate stocks to buy, Annaly Capital Management (NLY) shares opened at $6.43 having a forward dividend and yield of $0.88 and 13.5% respectively.

In the past, Annaly Capital Management has had a quarterly dividend that was higher than the current one of 22 cents per share. Some investors might worry at that, but this is not inherently a bad signal. REITs are not immune to the general economic conditions and amid the pandemic real estate sector suffered.

In 2019 the quarterly dividend was 25 cents and 30 cents, and back in 2012, it was 55 cents. The forward payout ratio is 97.94%, which is very high.

In the first quarter of 2022, Annaly Capital Management reported its GAAP EPS of $1.36 beat by $1, and revenue of $518.39 million beat by $178.7 million.

Shares have losses of over 17% year-to-date.

Chimera Investment

Dividend Yield: 13.7%

Chimera Investment Corporation (CIM) shares opened at $9.61 and now have a forward dividend and yield of $1.32 and 13.7% respectively.

The shares have losses of 36% year-to-date, making them now very attractive both for a potential short-term bounce and, of course, for a long-term financial return.

Although a bottom in the price for CIM stock is hard to predict, the one-year target is $11.94, representing a potential upside potential of around 24%.

Q1 2022 earnings were not great, as the firm reported a GAAP net loss of $1.19 per diluted common share, which missed by $1.47. Revenue of $137.7 million also missed by over $3 million.

The forward payout ratio is 95.09% and the stock has an average annual of 10.17% over the past 10 years.

Ellington Financial

Dividend Yield: 11.7%

Ellington Financial (EFC) shares opened at $15.44, offering a forward dividend and yield of $1.80 and 11.7% respectively. An interesting note is that on April 18, the company announced “its estimated book value per share of common stock of $17.74 as of March 31, 2022.”

This estimate signals an undervalued stock with a price-to-book value of less than 1. Investing in undervalued stocks is almost always a great investment decision that offers a high potential return. The one-year target for shares of Ellington Financial is $18.34. The current dividend of 15 cents has been paid out monthly, which is a great way to generate passive consistently.

The forward payout ratio is 92.8%, with a little room to get even higher.

The average 10-year return for EFC stock is 10.3%.

Starwood Property Trust

Dividend Yield: 8.1%

Starwood Property Trust (STWD) shares have losses of 4% in 2022 and have been resilient compared to the broader stock market selloff. The opening stock price of $23.57 offers a forward dividend and yield of $1.92 and 8.1% respectively. The dividend yield is almost the same as the latest figure of 8.5% for U.S inflation in March, so any decline in the inflation rate makes STWD stock an effective inflation hedge.

Investors are bullish, as the stock has a one-year target of $28.43. Q1 2022 earnings were mixed with a beat on EPS and a miss on revenue. EPS GAAP of $1.02 was a beat by 62 cents and revenue of $293.99 million was a miss by $22.25 million.

The forward payout ratio of 84.11% has room to get bigger, as the last time the quarterly dividend of 48 cents was increased was back in 2014.

The average 10-year annual return has been 13.09%.

New York Mortgage Trust

Dividend Yield: 13.2%

The last of our real estate stocks to buy, New York Mortgage Trust (NYMT) shares have been in the penny stock status throughout 2022, opening at $3.03. Recently I wrote an article on penny stocks and did not include NYMT stock. I could have easily added it for the following reasons.

First a forward dividend and yield of 40 cents and 13.2% respectively.

Second, a forward P/E Ratio of 8.8 makes the stock very cheap.

Third, the company in its Q1 2022 financial results reported that its book value per common share at the end of the period was $4.36. This is a discount of nearly 31% in terms of book value compared to the stock price.

One thing to be careful of? The forward payout ratio of 120.48% is too high and may be subject to a decline to become more sustainable.

The 10-year average return is 6.59%. That may seem low, but now the NYMT stock offers a potential upside return of nearly 40%, as it has a one-year target of $4.22. The total return including the dividend yield in this scenario would be more than 50%.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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