3 High-Yield REITs That Cover Their Dividends

These 3 high-yield REIT stocks have enough earnings known as funds from operation (FFO) to cover the dividend payments to shareholders. This article will describe these REIT stocks and some related covered call option opportunities. 

REITs produce FFO which is different from GAAP net income in two major respects. The two major differences are (1) FFO adds back both depreciation and amortization expenses, and (2) FFO adds back certain compensation expenses as well. This makes FFO higher than net income earnings. 

However, this reflects a more realistic cash flow approximation for the REIT. This matters since investors want to know how much cash flow the REIT has to cover the high-yield dividend payments. It tends to make the dividend payment more secure in the minds of the REIT investor.

In addition, I will highlight several out-of-the-money covered calls that investors might want to look at with several of these stocks.

Global Self Storage (SELF)

Global Self Storage is a self-storage company. This stock yields 4.42% today, which means its 26 cents dividend is 4.42% of its $5.88 stock price as of June 13. The dividend is well covered by the company’s earnings for both 2022 and 2023.

For example, the company reported on May 16 that its adjusted FFO for Q1 was 9 cents. That works out to AFFO (adjusted funds from operation) of 36 cents annually and this more than covers the 26 cents dividend payment.

Moreover, analysts forecast that its 2023 FFO would be 38 cents per share. That will more than cover the company’s dividends. This makes SELF stock's dividend look very secure.

Store Capital Corp (STOR)

Store Capital which has a 6.1% dividend yield, has a name that stands for “single-tenant operational real estate.” It is a large $7.4 billion market capitalization REIT. It has a well-diversified portfolio of over 2,500 properties.

The company produced an adjusted FFO, or AFFO of 57 cents per share. That is significantly higher than its 38.5 cents quarterly dividend, which works out to an annual dividend rate of $1.54 per share. This gives the stock at today's price of $25.13 a dividend yield of 6.1%

Analysts forecast that its FFO for 2022 will be $2.17 per share, well more than that $1.54 in dividends for the year. The following year, analysts forecast that AFFO will be $2.24 per share. The company is also protected from inflation issues, as its leases have escalation clauses based on the CPI. 

As a result of these two factors, its high cash flow, and its inflation protection clauses, the stock's 6.1% dividend yield is very secure.

One way to create extra income is to sell out-of-the-money covered calls. For example, as the Barchart table below shows, the $30 strike price call for expiration on Oct. 21 is very attractive.

This shows that you can collect $30 per call option contract. That works out to a 1.2% yield based on the cost of $2,507 for 100 shares that cover the call option over the next four months, if held to expiration. That works out to an annualized return of 3.6%, on top of the 6.1% dividend yield return. This gives you a potential total return of 9.7% over the next 12 months if this can be replicated every four months.

Realty Income (O)

Realty Income is a $38 billion market cap REIT that has a dividend yield of 4.65%. This is based on its $2.96 annual dividend and the price as of June 13 of $63.68.

Realty Income is forecast to produce $4 in AFFO per share for the year ending 2022. It is also seen as growing modestly at a 3.3% rate to $4.13 by the end of 2023. This shows that the company is able to produce more than enough to pay the $2.96 annual dividend going forward.

This makes its 4.65% dividend yield fairly secure. For example, this leaves plenty of room — over $1.04 in AFFO for 2022 — over and above the $2.96 dividend, just in case a recession lowers analysts’ AFFO projections.

One covered call worth looking at is the Sept. 16 $70 strike price. That call option produces an income of 88 cents at the mid-point for the call option seller, or $88 per contract.

This works out to a return of 1.38% based on the cost of 100 shares of $6,363 at today's price if held for the full 95 days until expiration. That works out to an annualized return of 5.52% on top of the dividend yield of 4.65%. That means investors can make a total yield return of over 10% (10.17%).  These covered call options held enhance your return on these REIT stocks.