2 Stocks to Invest in U.S. Real Estate

Do you need more income? Consider diversifying your real estate portfolio to the south via value U.S. REITs.

| More on:
office buildings

Image source: Getty Images

Are you strapped for cash? Canadians can diversify their real estate investments to south of the border. You can start earning passive income immediately from U.S. real estate investment trusts (REITs) that tend to have big dividends, because they must pay out at least 90% of their taxable income as dividends.

Discounted but quality U.S. REIT for a 5.3% yield

In most economies, STORE Capital (NYSE:STOR) generates stable and growing funds from operations (FFO). The U.S. REIT ended second quarter with a high occupancy rate of 99.5% and a weighted average remaining lease term of 13 years.

As a net-lease REIT, its tenants are responsible for paying property taxes, insurance, and maintenance. Moreover, 64% of its 3,012-property portfolio are in service industries that encourage customers to revisit. Its FFO per share rarely drops. It did (by 8%) in 2020 due to temporary economic shutdowns. By all means, that’s not a huge drop.

The dividend stock has delivered as a REIT since it started trading publicly in 2014. That is, it has increased its dividend healthily every year. For example, its dividend-growth rate compounded at close to 5.9% annually over the past five years.

Right now, STORE Capital is undervalued by about 20% from its longer-term normal valuation. The stock yields about 5.3%. Assuming an FFO growth rate of 5%, approximated returns would be north of 10% without any valuation expansion. Investors can also look forward to the REIT increasing its dividend by 5%, more or less, next month.

There’s good reason to believe that the REIT will grow its FFO, which is an important metric that REIT payout ratios are based on, much like earnings for companies. STORE Capital’s 2021 FFO payout ratio was 73%, which aligns with its historical range. Furthermore, it has inflation escalations for its leases that can help drive growth.

Another undervalued U.S. REIT for big dividend income

Most of Medical Properties’s (NYSE:MPW) portfolio of hospitals are in the U.S. but it’s also invested in other geographies, including the U.K., Switzerland, Germany, and Australia, among others. Higher interest rates are a dampener on growth for REITs, but Medical Properties has demonstrated its ability to keep its FFO per share stable and steadily growing since 2011.

The value REIT trades at a decent discount of close to 28% from its normal valuation. However, a part of the discount is due to slower expected growth. Should interest rates plateau or even come down a bit at some point, it could be a catalyst for valuation expansion.

In the meantime, the healthcare REIT pays investors well to wait. It offers a high yield of 6.9% on a FFO payout ratio of about 64%.

Earn U.S. dividends in your RRSP/RRIF

Because U.S. dividends are foreign dividends, they are taxed at Canadian investors’ marginal tax rates if earned in non-registered accounts. In non-retirement accounts, there’s a 15% foreign withholding tax on the dividend that cannot be avoided, even in the Tax-Free Savings Account. To get the full U.S. dividend, hold U.S. REITs in your Registered Retirement Savings Plan or Registered Retirement Income Fund. Consult a qualified tax professional or financial advisor if you need help figuring out the best place to hold your U.S. REITs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Medical Properties Trust and STORE Capital Corp. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »