4 Top Dividend Payers of the S&P 500

Real estate investment trusts (REITs) are usually great places for income investors to look for yield. These stocks generally develop real estate assets like office buildings or shopping malls and then lease out the individual units.

Here are four interesting REITs in the S&P 500 with decent dividend yields that are worth a look. 

Mortgage REITs had a rough 2022, but the worst might be over

Annaly Capital (NLY) is a mortgage REIT that is one of the top dividend payers in the S&P 500. Mortgage REITs tend to have extremely high dividend yields, but last year was very tough for the sector overall.

Mortgage REITs like Annaly Capital borrow money and then invest in mortgage-backed securities. The difference between what they earn on the securities and what they pay on the borrowed funds represents the gross profit. In many ways, a mortgage REIT looks more like a bank or hedge fund than a traditional REIT.

Last year was difficult for the mortgage REIT sector, as the Federal Reserve's aggressive rate hikes raised funding costs and caused mortgage-backed securities to underperform Treasuries. This led to declines in book value per share. Annaly Capital was able to avoid cutting its dividend, but funds available for distribution barely covered the dividend last quarter.

If things continue to improve for the mortgage sector, Annaly might be able to avoid cutting its dividend. That said, a recession next year might force the company's hand. Annaly currently has a towering 16.3% dividend yield. 

Simon is a strong REIT, but retailer bankruptcies can hurt the bottom line

Simon Property Group (SPG) is a REIT that invests in shopping malls and premium outlet centers. The REIT also owns an 80% noncontrolling interest in the Taubman Group and a stake in French retailer Klepierre. The company owns or has an interest in 230 properties comprising 184 million square feet of space in North America.

Simon's performance is largely driven by consumer spending, so if the economy enters a recession, earnings could fall and some of Simon's big tenants could get into trouble. This happened when JC Penney filed for Chapter 11 bankruptcy in early 2020, and Simon Property Group and Brookfield Asset Management ended up buying JC Penney for cash and assumed debt. With home goods retailer Bed Bath and Beyond in trouble, Simon Property Group might have to accept some losses from this tenant too.

Simon has a dividend yield of 5.8%, and its $7.20 dividend per share was well covered by funds from operations (FFO) per share of $11.87 earned in 2022.

The rollout of 5G will drive Crown Castle's business

Crown Castle (CCI) is a communications infrastructure REIT, which means it is in the cellphone tower business. If you are driving down the interstate and see a huge fake tree, it is a cellphone tower. The communications infrastructure business builds towers and then leases capacity to mobile phone providers, cable companies, and governments.

Rising demand for mobile data continues to be the driver for the business, and the adoption of 5G will require more capacity. Crown Castle is building out its small cell networks to capture this development. 

Crown Castle's dividend yield is 6.3%, and its annual dividend of $6.26 is well covered by the company's estimated 2023 FFO per share. The company sees 2023 FFO per share coming in at $7.58 to $7.68. 

Realty Income is a highly defensive REIT

Realty Income (O) is a single-tenant REIT with an unusual lease structure. Most leases are gross leases, where the tenant is responsible for paying rent and the landlord absorbs all the other expenses. Realty Income is a triple net lease REIT, which means most expenses are borne by the tenant. These leases tend to have long terms and contain automatic escalators. They are also extremely expensive to break. 

Realty Income tends to have highly defensive tenants, including drugstores, convenience stores, and dollar stores. These retailers are less sensitive to economic slowdowns because people still need to buy over-the-counter medications and toiletries.

Realty Income has also been a stalwart dividend payer and has a long history of annual dividend increases. At current levels, the stock yields 4.5%. 

In Conclusion

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Originally published on Fool.com

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield Asset Management and Crown Castle. The Motley Fool recommends Simon Property Group. The Motley Fool has a disclosure policy.