The recent rise in the 10-year U.S. Treasury yield to 5.3% presents income-focused investors with a compelling alternative to dividend-paying stocks, especially as real estate investment trusts (REITs) face pressure from increasing interest rates.
The recent downturn in REITs has resulted in higher dividend yields and lower valuations, creating potential opportunities for investors willing to accept increased risk for the possibility of higher income and capital gains if REIT stocks recover.
With several notable REITs now offering yields between 6% and over 15%, investors are faced with the decision of whether to invest in these real estate stocks or secure attractive yields from Treasuries.
The Attraction of 10-Year Treasury Yields
For high-net-worth individuals aiming to preserve capital while earning reliable income, 10-year U.S. Treasuries have become increasingly appealing. At a yield to maturity of 5.3%, a $500,000 investment in Treasuries would yield approximately $26,500 annually, or $265,000 over ten years before taxes, assuming the bonds are held to maturity.
Treasury securities are backed by the U.S. government, offering significant protection against default risk. Additionally, interest from these securities is exempt from state and local taxes, making them particularly attractive to investors in higher tax brackets.
However, Treasuries have their downsides. Their fixed payments provide limited inflation protection, and rising interest rates can decrease the market value of existing bonds, potentially leading to capital losses if sold before maturity. Conversely, declining yields can increase the value of bonds purchased at higher yields, offering opportunities for capital gains if sold before maturity.
Although the 10-year Treasury yield has since decreased to around 5.1%, its historically high level highlights the competition faced by dividend-paying REITs1.
Potential Long-Term Returns from High-Yield REITs
In September, the FTSE Nareit All Equity REITs Index (FNER) fell by 5.7% as rising bond yields and tighter monetary policy impacted the sector. REITs typically experience selling pressure when Treasury yields increase because their dividends become less competitive with government bonds. Additionally, higher borrowing costs can affect profitability, financing activities, and property valuations.
However, the recent market correction has made several REITs attractive from an income perspective, with dividend yields surpassing those offered by Treasuries. Unlike fixed-rate government bonds, REITs offer the potential for dividend growth and share-price appreciation, providing opportunities for stronger long-term total returns.
These opportunities come with increased risks, as REIT dividends are not guaranteed, and their shares remain susceptible to economic downturns, refinancing challenges, and higher interest rates2.
Top REITs to Consider
Ryman Hospitality Properties (NYSE:RHP) is a standout REIT, currently holding a Zacks Rank #1 (Strong Buy). Specializing in upscale convention hotels and entertainment properties, Ryman offers exposure to group travel, corporate events, and hospitality demand. Although its dividend yield of nearly 4% is below the 10-year Treasury, its positive earnings outlook makes it appealing for investors prioritizing total returns over immediate income.
American Assets Trust (NYSE:AAT) presents a more compelling opportunity for income-focused investors, offering a 6.34% dividend yield and a Zacks Rank #2 (Buy). With a diversified portfolio of office, retail, multifamily, and mixed-use properties in attractive U.S. markets, American Assets Trust provides a combination of above-Treasury income and potential recovery upside, though office exposure and refinancing costs remain significant risks.
Simon Property Group (NYSE:SPG), one of the world’s largest retail REITs, offers exposure to premium shopping malls, outlets, and mixed-use destinations. Its dividend yield of 4.43% is below the Treasury benchmark, but its established retail portfolio and potential for dividend growth could attract long-term investors, despite its current Zacks Rank #3 (Hold).
High-Yield Opportunities in Mortgage REITs
Investors willing to accept higher risk may find mortgage REITs appealing, though their elevated yields often reflect uncertainty about future distributions. Annaly Capital Management (NYSE:NLY) offers a dividend yield exceeding 16%, investing primarily in mortgage-backed securities and related assets. However, its leveraged strategy makes it sensitive to interest-rate volatility, financing costs, and changes in book value.
Blackstone Mortgage Trust (NYSE:BXMT) offers a yield exceeding 17%, supported by its commercial real estate lending portfolio. Nevertheless, concerns about commercial property valuations, borrower defaults, and loan refinancing create additional risks.
Chicago Atlantic Real Estate Finance (NASDAQ:REFI) stands out with a dividend yield of 20%. This specialty mortgage REIT provides financing primarily to state-licensed cannabis operators, a niche market offering attractive lending opportunities but with heightened regulatory, liquidity, and credit risks3.
All three currently have a Zacks Rank #3 (Hold), suggesting investors should weigh their substantial income potential against the risks associated with their high yields.
Monthly Dividend REITs as an Alternative
For those seeking consistent monthly cash flow, Realty Income (NYSE:O), EPR Properties (NYSE:EPR), and Invesco Mortgage Capital (NYSE:IVR) offer another avenue for income above the Treasury benchmark. Known as “The Monthly Dividend Company,” Realty Income provides a yield approaching 6%, supported by a diversified portfolio of commercial properties leased to large retail and service-oriented tenants.
EPR Properties offers a higher yield at nearly 7%, focusing on experiential real estate, including entertainment and recreational properties. While attractive for monthly income, its portfolio remains sensitive to consumer spending and tenant financial health.
Invesco Mortgage Capital offers one of the highest yields in the group, with a recently declared monthly dividend of $0.12 per share, implying an annualized yield over 25% at recent prices of $5 per share. However, Invesco’s substantial leverage and exposure to mortgage-backed securities make its dividend significantly more speculative than those of traditional property-owning REITs.
All three have a Zacks Rank #3 (Hold), with Realty Income and EPR providing more conventional real estate income exposure, while Invesco targets investors with a higher risk tolerance.
Footnotes:
- The 10-year Treasury yield’s high level challenges REIT competitiveness. Source.
- REITs offer dividend growth potential but with increased risks. Source.
- Mortgage REITs provide high yields but carry significant risks. Source.
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