As the yield on the 10-year U.S. Treasury recently climbed to 5.3%, investors focused on income have a new alternative to consider beyond dividend-paying stocks. This development comes amidst increasing interest rates, which have put pressure on real estate investment trusts (REITs).
The recent downturn in REITs has led to higher dividend yields and lower valuations, presenting potential buying opportunities for those willing to take on additional risk in exchange for higher income and the possibility of capital gains if REIT stocks recover.
With some notable REITs now offering dividend yields ranging from 6% to over 15%, investors are faced with the decision of whether to invest in these real estate stocks or to secure attractive yields from Treasuries.
The Attraction of 10-Year Treasury Yields
For investors with significant capital who aim to preserve their wealth while generating steady income, 10-year U.S. Treasuries have become an increasingly appealing option.
At a yield to maturity of 5.3%, a $500,000 investment in Treasuries could yield approximately $26,500 annually, or $265,000 over a decade, assuming the bonds are held until maturity. These securities are backed by the U.S. government, offering significant protection against default risk. Additionally, interest from Treasuries is exempt from state and local income taxes, which can be particularly beneficial for investors in higher tax brackets.
However, Treasuries are not without their drawbacks. Their fixed payments offer limited inflation protection, and rising interest rates can decrease the market value of existing bonds, potentially leading to capital losses if sold before maturity. Conversely, if yields decline, the value of bonds purchased at higher yields can increase, offering opportunities for capital appreciation if sold before maturity.
Although the 10-year Treasury yield has recently decreased to about 5.1%, its historically high level highlights the competition that dividend-paying REITs face.
Potential Long-Term Gains from High-Yield REITs
The FTSE Nareit All Equity REITs Index fell by 5.7% in September due to rising bond yields and tighter monetary policy affecting the sector.
REITs often experience selling pressure when Treasury yields rise because their dividends become less competitive compared to government bonds. Additionally, higher borrowing costs can impact profitability, financing activities, and property valuations.
Nonetheless, the recent market correction has made several REITs attractive from an income perspective, with dividend yields surpassing those offered by Treasuries.
Unlike fixed-rate government bonds, REITs provide the potential for dividend growth and share-price appreciation, which could lead to stronger long-term total returns. However, these opportunities come with increased risks, as REIT dividends are not guaranteed, and their shares remain susceptible to economic downturns, refinancing challenges, and rising interest rates.
Leading REITs to Watch
Ryman Hospitality Properties (NYSE:RHP) is notable among REITs, currently holding a Zacks Rank #1 (Strong Buy). Specializing in upscale convention hotels and entertainment properties, Ryman offers exposure to group travel, corporate events, and hospitality demand. Although its dividend yield of nearly 4% is lower than the 10-year Treasury, its positive earnings outlook makes it appealing for investors focusing on total returns over immediate income.
American Assets Trust (NYSE:AAT) is another attractive option for income-focused investors, offering a 6.34% dividend yield and a Zacks Rank #2 (Buy). With a diverse portfolio of office, retail, multifamily, and mixed-use properties in desirable U.S. markets, American Assets Trust provides a mix of above-Treasury income and potential recovery upside. However, office exposure and refinancing costs remain significant risks.
Simon Property Group (NYSE:SPG), one of the world’s largest retail REITs, offers exposure to premium shopping malls, outlets, and mixed-use destinations. Its dividend yield of 4.43% is below the Treasury benchmark, but its established retail portfolio and potential for dividend growth could attract long-term investors, despite its current Zacks Rank #3 (Hold).
Mortgage REITs with High Yields
Investors willing to accept higher risk may find mortgage REITs appealing, although their elevated yields often reflect greater uncertainty about future distributions.
Annaly Capital Management (NYSE:NLY), trading under $20 a share, offers a dividend yield exceeding 16%, primarily investing in mortgage-backed securities and related assets. However, its leveraged investment strategy makes it sensitive to interest-rate volatility, financing costs, and changes in book value.
Blackstone Mortgage Trust (NYSE:BXMT), priced at $10 a share, offers a yield exceeding 17%, supported by its commercial real estate lending portfolio. Nevertheless, concerns about commercial property valuations, borrower defaults, and loan refinancing pose additional risks.
Chicago Atlantic Real Estate Finance (NASDAQ:REFI), trading below $10 a share, stands out with a dividend yield of 20%. This specialty mortgage REIT provides financing primarily to state-licensed cannabis operators, a niche market offering attractive lending opportunities but carrying heightened regulatory, liquidity, and credit risks.
All three of these mortgage REITs currently have a Zacks Rank #3 (Hold), indicating that investors should weigh their substantial income potential against the risks reflected in their high yields.
For those seeking consistent monthly cash flow, Realty Income (NYSE:O), EPR Properties (NYSE:EPR), and Invesco Mortgage Capital (NYSE:IVR) present another route to income above the Treasury benchmark.
Realty Income, known as “The Monthly Dividend Company”, offers a yield approaching 6%, supported by a diversified portfolio of commercial properties leased primarily to large retail and service-oriented tenants.
EPR Properties provides an even higher yield at nearly 7%, focusing on experiential real estate, including entertainment and recreational properties. While attractive for monthly income, its portfolio remains sensitive to consumer spending and tenant financial health.
Invesco Mortgage Capital offers one of the highest yields in the group, with its recently declared monthly dividend of $0.12 per share implying an annualized yield over 25% at recent prices of $5 a share. However, Invesco’s substantial leverage and exposure to mortgage-backed securities make its dividend significantly more speculative than the distributions of traditional property-owning REITs.
All three currently have a Zacks Rank #3 (Hold), with Realty Income and EPR offering more conventional real estate income exposure, while Invesco targets investors with a considerably higher risk tolerance.
Conclusion: Weighing REITs Against Treasury Yields
With 10-year Treasuries offering yields near 5%, risk-averse investors have a compelling opportunity to secure dependable income without assuming the credit, dividend, and share-price risks associated with REITs. This may be particularly appealing to high-net-worth investors seeking consistent income and long-term appreciation potential while putting substantial capital to work.
However, the recent REIT selloff has also created rare opportunities for investors seeking higher income and potential capital appreciation, particularly if borrowing costs eventually stabilize or decline.
Ultimately, Treasuries appear better suited for preserving principal at maturity and locking in predictable returns, while select REITs may offer superior long-term total-return potential for investors comfortable with greater volatility.
For investors seeking a middle ground, combining Treasury securities with fundamentally sound, high-yield REITs could provide a balanced approach to income generation and long-term growth.
Footnotes:
- The 10-year U.S. Treasury yield recently reached 5.3%. Source.
- The FTSE Nareit All Equity REITs Index declined 5.7% in September. Source.
- Ryman Hospitality Properties (NYSE:RHP) holds a Zacks Rank #1 (Strong Buy). Source.
- Annaly Capital Management (NYSE:NLY) offers a dividend yield exceeding 16%. Source.
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