Collecting dividends from real estate investment trusts (REITs) can be a great source of extra income. In fact, one of our best REITs to buy before 2020 has a dividend as high as 12.76%.
Some investors might not be excited about a high yield like this. They worry that the big dividend won't count for much after taxes.
But these investors don't realize that REIT dividends are taxed at your standard income tax rate instead of your capital gains tax rate.
Provided a REIT pays its required 90% of taxable income to shareholders as dividends, it won't be taxed on the corporate side.
Because of this, investors get a larger payout than they would with a non-REIT stock, which can more than make up for the extra taxes paid on a dividend.
Another concern is that dividend-paying stocks are somewhat sensitive to rising and falling interest rates. But history proves that they continue to perform in any condition.
For example, as interest rates jumped more than 1% nine times between 1994 and 2017, the value of REIT stocks rose six times.
So interest rates can't exactly put a dent in a top REIT investment.
That's why you can expect to outperform the market with these five best REITs in your portfolio. In addition to a high dividend, you could also bank a 55% gain in share price with this first pick…
Best REITs to Buy Before 2020, No. 5: Iron Mountain
Iron Mountain Inc. (NYSE: IRM) is a Boston-based diversified REIT that focuses on information management and storage services.
The founder of the company, known as the "Mushroom King," made his fortune from the fungi but recognized a need in the market for secure storage as the Cold War heated up.
Iron Mountain now operates in 50 countries with over 1,400 data storage facilities. It securely holds valuable documents such as the wills of Charles Dickens, Princess Diana, and Charles Darwin, as well as the recording collections of Prince and Frank Sinatra.
Most of Iron Mountain's storage services are digital. It serves 95% of the Fortune 1000 companies. And data security is something that will never go out of demand. The anticipated cost of cybercrime by 2021 will be $6 billion annually, according to Cybersecurity Ventures. That's a 100% increase from 3 trillion in 2015.
Iron Mountain continues to improve its business model to boost revenue. In 2018, 19% of its revenue came from emerging markets, which was about double from five years earlier.
The company pays a 7.26% dividend to investors and has increased its yield for nine years straight.
This one also has a 4.6 Money Morning Stock VQScore™ system, which is the Money Morning version of a "Buy" rating. That's because analysts expect shares of Iron Mountain to gain as much as 55% over the coming year as the price soars from $32.72 to $51.
Best REITs to Buy Before 2020, No. 4: Sabra Health Care
Sabra Health Care REIT Inc. (NASDAQ: SBRA) is a California-based REIT that focuses on the investment of specialized healthcare facilities.
It owns and operates 304 skilled nursing and transitional care facilities, 106 senior living facilities, and 24 specialty hospitals.
In 2017, merger and acquisition activity allowed the company to become a strong force in this industry. Its operations now span 44 states and three provinces in Canada, with a $7.3 billion enterprise value.
As the baby boomers continue to age, the demand for healthcare services and senior housing will soar. According to the U.S. Census Bureau, the number of Americans ages 65 and older will jump from 50 million to 80 million over the next 15 years.
Sabra outmatches its competitors with its diversified holdings. No more than 9% of the company's properties are managed by a single tenant, and its top five tenants account for only 38% of its total portfolio. So, if the status of one tenant shifts, this won't have a large impact on Sabra's bottom line.
This top REIT currently trades at $22.64 per share, but it's poised to reach $27 within the year, a 19% jump.
The company pays a 7.66% dividend yield. Slightly higher than our last REIT pick, but not higher than this next one…
Best REITs to Buy Before 2020, No. 3: RLJ Lodging
RLJ Lodging Trust (NYSE: RLJ) is a Maryland-based REIT that primarily owns and operates focused-service, premium-branded, compact hotels.
Its current portfolio consists of 127 hotels and roughly 25,400 rooms across 23 states and the District of Columbia.
Hotels are lucrative real estate properties, not only for the room revenue but also for the conference space and restaurants they run. These hotels thrive during the wedding season or when conventions are in town, but some struggle during the off-season.
RLJ has addressed these issues by limiting dining and meeting spaces in its properties. This allows it to keep expenses lower and avoid the cyclical nature of the industry.
Some of the brands that it holds include Embassy Suites, Residence Inn, and Courtyard.
Analysts give this one a high target of $23, which is 43% above its current $16.45.
This stock pays a 7.95% dividend yield. But the yield on this next one is even higher…
Best REITs to Buy Before 2020, No. 2: KKR Real Estate
KKR Real Estate Finance Trust Inc. (NYSE: KREF) is a New York-based real estate finance firm that focuses on mortgages. It issues loans for real estate instead of holding the properties themselves.
In light of the last financial crisis, anything involving mortgages might seem risky, but KKR limits its loans to commercial borrowers instead of unqualified residential loans.
So, another housing bubble won't adversely impact this REIT.
Multifamily housing loans account for 55% of its portfolio, followed by office space at 32%. Industrial, condos and hospitality make up the remaining 13%.
The fact that 99% of KKR's loans are senior loans, meaning they are secured and get first rights of recovery if there is trouble, is also a positive.
KKR is expected to pop 42% in price this year, from $29.39 to $42.
This REIT offers an 8.51% dividend yield. But it's not the highest dividend yield on our list…