The stock market has rallied sharply in the past year and has been routinely bumping up against new all-time highs. And that means stocks are starting to get pricey. The S&P 500 currently trades at about 24.5 times its earnings, which is above the sub-22.5 level it traded at one year ago.
However, there are still some bargains out there if you know where to look. For example, many real estate investment trusts (REITs) are still incredibly cheap because of the impact higher interest rates have had on real estate valuations. As a result, most offer high-yielding dividends. Three dirt cheap REITs to buy right now are W.P. Carey (NYSE: WPC), Realty Income (NYSE: O), and EPR Properties (NYSE: EPR).
Getting back on a growth trajectory
W.P. Carey currently expects to generate between $4.63 and $4.73 of adjusted funds from operations (FFO) per share this year. With its share price recently below $60, the diversified REIT trades at about 13 times its earnings at the midpoint of its guidance range. That incredibly cheap valuation is why its dividend yield is nearly 6% these days, several times above the S&P 500’s sub-1.5% level.
Higher interest rates are only one of the factors weighing on the REIT. It has been working to upgrade its portfolio over the past year by strategically exiting the office sector. It also had a large tenant exercise its option to purchase the properties it had leased from the REIT. These sales have weighed on W.P. Carey’s adjusted FFO, which led it to reset its dividend last year.
However, W.P. Carey is slowly rebuilding its portfolio. It agreed to invest $641 million across several industrial and retail property acquisitions by the end of June. It’s on pace to close $1.25 billion to $1.75 billion of deals this year. These acquisitions should put the REIT back on a growth trajectory in the second half of 2024. That has already enabled W.P. Carey to start increasing its dividend again. With lots more growth ahead, its current price and yield make it look very compelling, especially since its valuation should rise as its earnings return to a growth trajectory.
Still growing despite headwinds from higher rates
Fellow diversified REIT Realty Income expects to generate between $4.15 and $4.21 of adjusted FFO per share this year. With its stock trading at around $62, this REIT sells for less than 15 times its earnings. That’s the primary reason it currently offers a dividend yield of about 5%.
Because higher interest rates make it more expensive for the REIT to make new investments, it expects to invest only $3 billion this year to expand its portfolio, which excludes closing its $9.3 billion merger with Spirit Realty. That’s down from an average of over $9 billion during the past two years.
While higher rates are currently a headwind for the REIT, many expect them to start falling later this year. That would enable it to acquire more properties to support its steadily rising dividend. Realty Income has given its investors a raise for 107 straight quarters. A higher growth rate could also boost its valuation.
Your ticket to an exciting monthly income stream
EPR Properties focuses on experiential real estate such as movie theaters, attractions, and fitness and wellness properties. The specialty REIT expects its portfolio to produce between $4.76 and $4.96 per share of FFO as adjusted. With its stock price currently around $47 a share, it trades for less than 10 times its FFO. That incredibly cheap valuation is why its monthly dividend yield is over 7%.
The REIT has battled headwinds from higher rates and lingering issues facing some of its theater tenants following the pandemic. However, it has been putting those problems in the past. For example, it completed a comprehensive lease restructuring agreement with a bankrupt theater tenant last year. Now it’s been able to grow its portfolio, cash flow, and dividend.
EPR Properties currently expects to spend $200 million to $300 million on new property investments this year, which it will fund with post-dividend free cash flow and its strong balance sheet. It should be able to ramp up investment spending as interest rates fall. That should boost its earnings growth rate and the ability to increase its dividend in the future.
Cheap stocks are driving these high dividend yields
W.P. Carey, Realty Income, and EPR Properties are bargains these days that pay high-yielding dividends. That combination of yield and low valuation could enable these REITs to produce attractive total returns in the coming years as interest rates finally begin to fall. That makes them look like great buys right now before that catalyst takes hold.
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Matt DiLallo has positions in EPR Properties, Realty Income, and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
3 Incredibly Cheap High-Yield Dividend Stocks to Buy Now was originally published by The Motley Fool
