Real Estate Investment Trusts (REITs) are a major sub-class of income-producing assets, along with credit bonds (investment grade and high yield) and master limited partnerships. Real estate is also, pun intended, closer to home for most retirees, as we all need a place to live and still need land to grow our food and buildings for the shops and offices in which we spend our time. For this reason, I use a framework called the "4 House Pension" for asset allocation in individual retirement portfolios, which provides inflation-protected retirement income and is consistent with owning around 25% or more of one's overall wealth in real estate.
Global Passive REIT exposure can be added to a portfolio with two low-cost, liquid Vanguard ETFs: the Vanguard REIT ETF (VNQ) and the Vanguard Global ex-US Real Estate Index Fund (VNQI). Both currently have a dividend yield around 4% and the latter provides valuable diversification to non-US real estate markets for US investors, though is not hedged against currency risk as I believe foreign real estate investments generally should be.
To create a REIT portfolio yielding substantially more than this 4% weighted average, I screened for US-listed REITs yielding over 5%, but also with two additional "safety" factors: 1.) Interest cover of at least 2.5x, and 2.) Positive cash flow growth over the past 5 years. Those two factors reduced my US list down to 10 REITs, including only one mortgage REIT (typically the highest-yielding type of REIT):
1. Apollo Commercial Real Estate Finance Inc (ARI) - The only mortgage REIT on this list, this one has a top dividend yield of just over 10% with strong growth and debt coverage numbers, and trading at a discount to book value.
2. Omega Healthcare Investors Inc (OHI) - The first of two health care REITs yielding around 8%.
3. Medical Properties Trust Inc (MPW) - This other health care REIT yields just below 8% but is priced at a slightly cheaper multiple of 1.2x book vs OHI's 1.6x.
4. Gaming and Leisure Properties Inc (GLPI) does "triple net" leases of casino properties in Pennsylvania and yields 6.5%, even after the 20% rise in its stock price over the past 6 months (during which time VNQ has been flat).
5. Lasalle Hotel Properties (LHO) - The first of three hotel & resort REITs (which are allowed to own and rent out the hotel properties, but not operate them), this one also yields around 6.5% and trades at relatively inexpensive multiples, despite being relatively conservative with its use of leverage.
6. Chesapeake Lodging Trust (CHSP) - The second of three hotel & resort REITs, this one also yields around 6.5% and similarly focuses on upscale hotels in major US cities.
7. Xenia Hotels & Resorts Inc (XHR) - Xenia is the third of the three hotel and resort REITs on this list, and yields a substantially lower 5.5%. but includes hotel properties in some more diverse locations like Napa and Waikiki.
8. Kimco Realty Corp (KIM) - The only Retail REIT on this list (as Retail has been a heavily battered sector with the rise of Amazon), Kimco owns open-air shopping centers (which many of us might call "strip malls") across 32 states, Puerto Rico and Canada, and yields 5.5%
10. Granite Real Estate Investment Trust (GRP.U) - This one provides diversification both into Canada and into the Industrial REIT sector through its ownership of industrial real estate like warehouses, factories, and offices, and rounds out this list with a yield just about 5%.
As with most "quick picks" lists, this list is meant to be a starting point based on a few rules and screening criteria, so these names should be checked further before being added in any significant percentages to a portfolio.
Disclosure: I am/we are long VNQ, VNQI, ARI, OHI, MPW, GLPI, LHO, CHSP, XHR, KIM, LSI, GRP.U. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.