The U.S. Federal Reserve wraps up its first policy meeting of 2020 today. And markets do not expect the U.S. central bank will raise interest rates this week.
In fact, given the historically low and negative interest rates around the globe, the Fed is more likely to cut interest rates again this year instead of pushing borrowing costs higher.
The International Monetary Fund recently slashed its global growth outlooks for both 2020 and 2021, citing China's worsening economy as the driver of its revisions.
With interest rates low, investors should seek income-generating assets that pay well beyond the 10-year bond and provide price appreciation upside in the process.
And the best possible assets to combine both attributes are real estate investment trusts (REITs).
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You see, REITs allow you to cash in on a company's cash flow generated by properties across various sectors.
REITs provide one significant tax benefit that will enable investors to capture more of the cash flow. And since these investment vehicles distribute at least 90% of their taxable income to shareholders, they are not subject to corporate taxation.
Today, I'm taking a look at two dividends that provide additional upside.
More importantly, they pay investors annual dividends greater than 8% and have reduced downside given their superior positions in their respective real estate sectors.
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High-Income REITs to Buy No. 2: Tanger Factory Outlet Centers Inc.
Tanger Factory Outlet Centers Inc. (NYSE: SKT) is a REIT that operates 39 factory outlet shopping centers across the United States and Canada.
Right now, mall companies have been struggling under the weight of lower economic growth and concerns about brick-and-mortar retail traffic. That said, investors are dramatically overlooking this REIT, which has the best metrics in its industry.
The firm has opened 27% of all new outlet centers built since 2011. The company has more than 2,900 leased locations, a customer base of 510 branded companies including Gap Stores, PVH, Under Armour, Nike, Tapestry, Carter's, Michael Kors, and American Eagle Outfitters.
With 58% of its properties located near major tourist destinations, the company focuses explicitly on outlet centers around major metro centers or tourist destinations. As a result of this strategy, its outlet centers attract more than 181 million visitors each year.
Its financial performance is also very positive. Its occupancy cost ratio of 9.0% is the lowest in its entire industry. Also, the REIT has an occupancy rate of 95.9%, a figure that tops the whole mall REIT space. It has surpassed that occupancy rate every year since its inception in 1993.
Best of all, the company pays a massive dividend of 9.5%. Investors who want to tap into that incredible income should consider buying the stock right away. The firm will go ex-dividend on Jan. 30 and pay investors of record from Jan. 31.
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Currently, Tanger Factor Outlets Centers trades at $14.95 per share. But the upside of roughly $20 exists when markets correctly price this company and recognize its remarkable cash flow potential.
That price target would represent more than 33% in upside to complement a massive dividend.
High-Income REITs to Buy No. 1: PennyMac Mortgage Investment Trust
PennyMac Mortgage Investment Trust (NYSE: PMT) is a specialty finance company that focuses on residential mortgage loans and mortgage-related assets.
With a market cap of $1.2 billion, the company issues preferred shares at an 8.125% dividend that is fixed to float. This is important because preferred shares rank higher in the capital structure of the company. And most importantly, it provides more protection against a downturn or sudden problems for the company or the broader mortgage industry.
Naturally, the thought of mortgage assets might make anyone new to REITs a bit nervous. After all, mortgage-related products were the nuclear fuel that ignited the 2008 financial crisis.
With that in mind, it's important to note that PennyMac REIT was born out of the financial crisis in October 2009. It doesn't utilize the typical leveraged strategy of other mortgage REITs or invest in distressed mortgages.
The company focuses on organic investments in credit risk securities and mortgage servicing rights obtained through its production channels. The company has protected investors by shifting toward self-oriented mortgage servicing investments rather than working in its legacy distressed loan strategy.
This ties it closer to the robust growth of the U.S. housing industry, provides greater stability in its portfolio, and stabilizes the risk-reward profile. It also stabilizes its book value in the face of rising interest rates.
Shares currently sit at $23.40 per share. But I think intrinsic value for the stock is around $33, meaning the stock has another 41% to climb to represent its true value.
Also, its floating dividend sits at 8.03%, which is a rock-solid income option with markets near all-time highs.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.