In the current financial landscape, the yield on the 10-year U.S. Treasury has recently climbed to 5.3%, presenting a viable alternative for income-focused investors who typically gravitate towards dividend-paying stocks. This shift is particularly relevant as rising interest rates put pressure on real estate investment trusts (REITs).
The recent downturn in REITs has led to a significant increase in their dividend yields and a decrease in their valuations. This scenario may present buying opportunities for investors who are willing to accept higher risk in exchange for increased income and the potential for capital gains if REIT stocks recover.
Several leading REITs now offer yields ranging from 6% to over 15%. This raises the question for investors: should they take advantage of the dip in these real estate stocks or opt for the attractive yields offered by Treasuries?
The Attraction of 10-Year Treasury Yields
For investors with substantial net worth seeking capital preservation alongside reliable income, 10-year U.S. Treasuries have become increasingly appealing. With a yield to maturity of 5.3%, a $500,000 investment in Treasuries would yield approximately $26,500 annually, or $265,000 over a decade before taxes, assuming the bonds are held to maturity1.
These securities are backed by the U.S. government, providing significant protection against default risk. Additionally, the interest earned is exempt from state and local income taxes, making Treasuries particularly attractive to those in higher tax brackets.
However, Treasuries are not without drawbacks. Their fixed payments offer 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, allowing for capital appreciation if sold before maturity.
Although the 10-year Treasury yield has since fallen to about 5.1%, its historically high level highlights the competition faced by dividend-paying REITs2.
Why High-Yield REITs Might Offer Superior Long-Term Returns
The FTSE Nareit All Equity REITs Index (FNER) saw a 5.7% decline in September as rising bond yields and tighter monetary policies impacted the sector. REITs often face selling pressure when Treasury yields rise, as their dividends become less competitive compared to government bonds. Additionally, higher borrowing costs can affect profitability, financing activities, and property valuations.
Despite these challenges, the recent market correction has made several REITs attractive from an income perspective, with dividend yields surpassing those of Treasuries. Unlike fixed-rate government bonds, REITs offer the potential for both dividend growth and share price appreciation, which can lead to stronger long-term total returns. However, these opportunities come with greater risks, as REIT dividends are not guaranteed, and their shares remain vulnerable to economic downturns, refinancing challenges, and increased interest rates.
Leading REITs to Consider
Ryman Hospitality Properties (NYSE:RHP) is notable among REITs, currently holding a Zacks Rank #1 (Strong Buy). Specializing in upscale convention hotels and entertainment properties, Ryman provides exposure to group travel, corporate events, and hospitality demand. Although its dividend yield of nearly 4% is lower than the 10-year Treasury, its favorable earnings outlook makes it appealing for investors prioritizing total returns over immediate income.
American Assets Trust (NYSE:AAT) offers a more compelling opportunity for income-focused investors with a 6.34% dividend yield and a Zacks Rank #2 (Buy). With a diverse portfolio of office, retail, multifamily, and mixed-use properties in attractive U.S. markets, American Assets Trust combines above-Treasury income with potential recovery upside, though office exposure and refinancing costs remain key risks.
Simon Property Group (NYSE:SPG), one of the world’s largest retail REITs, provides 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 appeal to long-term investors, despite its current Zacks Rank #3 (Hold).
Mortgage REITs and Monthly Dividend Alternatives
Investors willing to accept higher risks may find mortgage REITs appealing, though their elevated yields often reflect greater uncertainty about future distributions. Annaly Capital Management (NYSE:NLY) offers a dividend yield exceeding 16%, primarily investing in mortgage-backed securities and related assets. However, its leveraged investment 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. Yet, concerns about commercial property valuations, borrower defaults, and loan refinancing add to the risks.
Chicago Atlantic Real Estate Finance (NASDAQ:REFI) stands out with a dividend yield of 20%, focusing on financing state-licensed cannabis operators, a niche market with attractive lending opportunities but heightened regulatory, liquidity, and credit risks.
For those seeking consistent monthly cash flow, Realty Income (NYSE:O), EPR Properties (NYSE:EPR), and Invesco Mortgage Capital (NYSE:IVR) offer alternatives. Realty Income, known as “The Monthly Dividend Company,” provides a yield approaching 6%, supported by a diverse portfolio of commercial properties. EPR Properties offers a yield near 7%, focusing on experiential real estate like entertainment and recreational properties. Invesco Mortgage Capital offers one of the highest yields, with a monthly dividend implying an annualized yield over 25% at recent prices, though its substantial leverage makes its dividend more speculative.
Conclusion: Choosing Between REITs and Treasuries
With 10-year Treasuries offering yields near 5%, risk-averse investors have a compelling opportunity to secure dependable income without the credit, dividend, and share-price risks associated with REITs. This option may particularly appeal to high-net-worth individuals seeking consistent income and long-term appreciation potential.
However, the recent REIT selloff has also created opportunities for those seeking higher income and potential capital appreciation, especially if borrowing costs stabilize or decline. Ultimately, Treasuries are better suited for preserving principal and locking in predictable returns, while select REITs may offer superior long-term total-return potential for those comfortable with greater volatility.
For a balanced approach, combining Treasury securities with fundamentally sound, high-yield REITs could provide a way to generate income and achieve long-term growth.
Footnotes:
- A $500,000 investment in 10-year Treasuries yields approximately $26,500 annually. Source.
- The 10-year Treasury yield’s historical high level highlights competition with REITs. Source.
Featured Image: Megapixl @ Andreyyalansky19
