3 REITS for Monthly Passive Income
Get ready for the tax season to end all tax seasons.
Not only are returns due on May 17th, but with Joe Biden outlining his tax proposals, get ready for months of nonstop media coverage.
Biden’s tax proposals have two main areas of focus:
- Corporate taxes: Proposals are to raise the corporate tax rate from 21% to 28% to fund infrastructure initiatives. This is a sharp increase but remains below statutory rates in 2017. While many companies pay far less, it will affect corporate earnings.
- Capital Gains: Bloomberg recently reported the president aims to raise the long-term capital gains tax on the richest 0.32% of Americans to 43.4% (inclusive of the ACA/Medicare surtax), nearly double the current top marginal rate of 23.8%.
These proposals could have big implications for not only select taxpayers, but also investors in 2021.
Understandably, investors sold off stocks on the day the capital gains news was reported. While stocks quickly bounced back in subsequent days, Biden’s proposals could shift interest into new asset classes.
Why REITs are well-positioned in Biden’s tax proposals
On the corporate tax side, REITs will mostly be unaffected due to their designation as a pass-through entity for tax purposes.
Simply put, this means federal corporate taxes are not levied on REITs provided they follow the rules set by Congress with respect to distributions and assets. Because of this designation, REITs become relatively more attractive than other assets, like stocks, that will see their after-tax profits decrease due to higher tax rates.
Things are admittedly more complicated on the distribution side. There are three ways REITs distribute cash to shareholders but the bulk of dividends are considered ordinary for tax purposes, akin to the same progressive treatment as earned income.
Ordinary income tax rates appear to not be affected by Biden’s proposed plans until you hit the top rates per Bloomberg, which is reportedly going to be increased from 37% to 39.6%, with the added surcharge taking it to 43.4% for net investment income that includes dividends. This rate matches Biden’s proposed top capital gains rate.
In total, REITs look comparably more favorable than in recent years when compared to growth stocks that provide the bulk of returns from capital gains and will be subject to lower overall taxes than dividend-paying stocks whose distributions are double taxed.
It’s important to reiterate the changes with respect to capital gains are only for investors who make over $1 million. Still, these changes could cause capital inflows from deep-pocketed investors looking for ways to limit the tax man’s bite.
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3 Monthly REITs All Investors Should Know
It’s never a bad time to review the REIT landscape. With these companies offering stability and paying out passive income streams, far too many investors ignore this asset class.
With REITs comparatively benefitting from Biden’s tax plan, we’re digging into three of our favorite ideas today.
STAG Industrial (NYSE: STAG)
Price: $41.32 (as of close Jul 29, 2021)
STAG Industrial has carved out a niche as an ecommerce-focused REIT on account of the company’s portfolio of 492 buildings and 100 million square feet are mostly warehouses like the type used in the distributional network for ecommerce companies. Amazon is STAG Industrial’s biggest single tenant, accounting for 3.8% of revenue.
Having Amazon as your biggest tenant can be both a blessing—a high profile tenant serves as a seal of approval—and a curse because Amazon is known to relentlessly negotiate with its service providers.
However, STAG is insulated from customer power as its top 20 tenants only account for 19.5% of its total revenue. The REIT is further diversified across industries with only a single industry (auto components) contributing more than 10% of sales. Despite the downturn from the pandemic, STAG Industrial’s strong risk management policies led to an occupancy rate of 97.2% in 2020.
Shares have advanced 80% in the last five years as long-term investors learn more about the company and its monthly dividend payout of $0.121 per share, or $1.45 on an annualized basis. Although it currently only yields 4%, Stag has been able to grow its dividend every year since going public in 2011
The dividend is on firm footing as funds from operations will easily support the payout. Management estimates FFO will be $1.97 per share this year. Stag Industrial will benefit from increased economic activity from the reopening of America and has the long-term driver of ecommerce growth.
Realty Income (NYSE: O)
Price: $70.29 (as of close Jul 29, 2021)
When most investors think of monthly-pay REITs, Realty Income is often the first name to be discovered. That’s not by accident as Realty Income’s management considers this a key feature in their value proposition, even trademarking the term “The Monthly Dividend Company.”
Realty Income has lived up to this promise, recently declared its 610th consecutive monthly dividend in April, a mere month after declaring its 110th dividend increase since its public listing in 1994, a cadence that generally occurs quarterly. Currently shares pay out $0.235 monthly, good for a yearly payout of $2.82 per year.
Realty Income is the leader in the single-tenant net-lease space. The company’s reputation and scale allow it to earn the trust of stable Fortune 500 tenants like Walgreens, Dollar General, FedEx, and Dollar Tree.
In fact, 60% of its top 20 tenants have investment grade credit ratings, and Realty Income even maintains an investment grade (IG) credit rating itself.
The IG rating allows it to access the debt markets for cheaper than competitors like Vereit, which the company just announced it would acquire in an all-stock deal. A key component of unlocking value from this deal is the finance savings from Realty Income’s higher IG credit rating.
Realty Income is considered a lower-risk REIT. For example, despite the pandemic the portfolio occupancy rate for Realty Income barely budged, ending 2020 with 97.9% occupancy across its nearly 6,600 hundred properties.
Shares are not as cheap as they once were due to the fact the company has advanced 30% in the last year. Currently the company yields 4% and trades at 20.4 times 2020’s AFFO. However, if you’re looking for a lower risk REIT with a monthly payout, Realty Income should be on your list.
Broadmark Realty Capital (NYSE: BRMK)
Price: $10.37 (as of close Jul 29, 2021)
Unlike Realty Income or STAG Industrial, Broadmark Realty Capital’s primary business isn’t in owning property. Instead, its primary asset is in the underlying financial products needed to acquire the properties, as it’s a mortgage REIT, or “mREIT.”
Specifically, Broadmark is considered a “hard-money” lender, stepping in to provide loans that traditional banks and financiers do not. Unlike other publicly traded mREITs that buy pools of mortgages, this allows Broadmark to directly underwrite borrowers and to work in an area with less competition.
For many familiar with the space, the phrase “hard money lender” often gives reason to pause. The business is often faulted for short-term loans with unreasonable terms and interest rates and subject to boom-and-bust cycles because of the tremendous debt they themselves acquire to make loans.
The industry has done a lot to clean itself up and now exists as a legitimate source of capital. Broadmark further protects against risk by avoiding debt of its own, a move that slows growth and payouts but protects against risk. However, the company has no debt outstanding, a historical loss rate of 0.1%, and an average LTV of the properties it lends on of less than 60%.
Currently, shares pay $0.07 per month, or $0.84 annualized, which is a dividend yield of 7.9%.
Don’t let investing become too taxing
You’re likely about to be deluged with opinion pieces about Biden’s plan in the weeks ahead. It’s important to keep in mind a few points:
Due to a nearly split legislative branch, a lower top marginal rate on long-term capital gains for high earners and corporate tax rates appears more likely. It’s important to also reiterate most investors will not be subject to any changes in capital gains because of these proposed changes.
Finally, do not let tax implications dictate your investment choices. For one thing, studies have shown that tax rates have little historical impact on stock returns in the long run. Instead, use this as an opportunity to look into REITs as an asset class for further diversification and as an addition to your passive income portfolio.
Check out our full article on how to invest in REITs.