High yield stocks come out of a range of different business sectors. At recent MoneyShow investor conferences, I have given a two-hour presentation on the features, pros, and cons of the different higher-yield securities. You may be aware of business development companies (BDCs), real estate investment trusts (REITs), and master limited partnerships (MLPs).
Also, on high yield investor radars will be closed-end funds (CEFs) and leveraged ETFs. For an attractive yield combined with a high level of safety, I believe some of the best high yield stocks come from a subsector of one of these three-letter descriptors.
REITs operate under a pass-through tax rule that allows a company not to pay corporate income taxes if its business involves the ownership or financing of real estate and at least 90% of net income is paid to investors as dividends. The REIT sector can be divided into equity REITs and finance REITs.
Equity REITs are companies that own commercial real estate. These companies usually specialize in a specific type of property, such as healthcare, hotels, office buildings, warehouses, and apartments.
Finance REITs operate on the lending side of real estate. A finance REIT may be a lender or just a company that owns a portfolio of mortgage-backed securities (MBS). A lot of finance REITs will be a combination of originating new mortgages, packaging mortgages for sale and fee income, holding loans in a portfolio, and owning MBS.
Finance REITs separate into two categories. These companies typically focus on either the residential side of mortgage lending or on commercial property financing. The residential mortgage side exposes investment portfolios to a lot of interest rate risk to be able to turn 4% home loans into a 10% stock dividend yield. I am not a fan of this business model. The commercial mortgage REITs, on the other hand, give investors an attractive combination of high current yield and a financially conservative business model.
Commercial finance REITs have these attractive attributes:
- Commercial mortgages are written at low loan to value amounts. These companies typically have portfolios with an overall 65% LTV.
- Commercial mortgages are almost always adjustable rate. This means that if interest rates increase, so will the REIT’s interest income.
- Commercial property lending requires a high level of expertise and flexibility. This allows the REITs to generate higher yields on the loans they make.
- A commercial finance REIT can generate attractive yields on equity using a very moderate amount of leverage.
Here are three commercial finance REITs that will put some serious yield into your income portfolio.
Starwood Property Trust, Inc. (STWD) is one of the largest commercial lenders of any business type – including banks.
The company currently has an $8.2 billion loan portfolio with a 64% loan to value. Since launching in 2009, the company has put out over $40 billion in loans and investments with zero realized losses.
In recent years, Starwood has acquired the largest commercial mortgage special servicer. This acquisition has produced growth in CMBS origination and investments.
The company also owns a $2.7 billion equity commercial property portfolio that generates 9% to 12% cash on cash returns.
In 2018 STWD moved into infrastructure lending with the $2.5 billion purchase of GE’s Energy Project Finance Debt platform.
Management always looks for investment opportunities both in and out of the commercial mortgage business. STWD current yields 8.2%.
Ladder Capital Corp (LADR) has $6.4 billion in assets and uses a three-prong approach to its investment portfolio. The three legs are commercial mortgage loans, which account for 50% of the company’s capital allocation; commercial real estate equity investments for 15%; and commercial MBS bonds accounting for 28%.
The business plan is that the three groups shift as more or less attractive through the commercial real estate cycle.
Leverage is a comfortable 2.6 times equity. Since it paid its first dividend for Q1 2015, Ladder has steadily increased the quarterly payout at an average 8% annual growth rate. The shares currently yield 8.0%.
Blackstone Mortgage Trust, Inc. (BXMT) is a pure commercial mortgage lender. The REIT receives high-quality mortgage lending leads from its sponsor, The Blackstone Group L.P. (BX).
As of its 2019 first-quarter earnings, BXMT had a $15.8 billion portfolio of senior mortgage loans. 94% of the portfolio is floating rate.
The loans were at 63% loan to the value of the underlying properties. In the first quarter, the company originated $1.3 billion of new loans.
For the first half of 2018, BXMT put out almost $1 billion if international originations. Leverage is 2.5 times debt to equity. The stock currently yields 7.0%.Pay Your Bills for LIFE with These Dividend Stocks
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