3 Top Passive Income Stocks to Buy With Dividends Over 5% – The Motley Fool | Vette Leader

Long-term capital appreciation from stocks is one of the best ways to save for retirement. If you can generate 8% or more annual returns for decades, that may be enough to retire. In the short term, however, market volatility can cause even the long-term oriented investor to lose sleep.

One way to keep your faith through downturns is to add some conservative dividend stocks to your portfolio. They can have the same declines as other stocks, but if you pick the right ones, they’ll keep paying dividends to ease your short-term pain. The three Real Estate Investment Trusts (REITs) we will discuss Eisenberg (IRM -0.15%), Blackstone Mortgage Trust (BXMT 0.26%)and Macerich Co (MAC 1.04%)all have strong dividend yields in excess of 5% and could be the new backbone of your portfolio.

Eisenberg

Iron Mountain is a combo REIT. For years it specialized in storing high-priced specialty items such as art and other records that needed to be kept safe. That analog business is still chugging along, generating about $1.5 billion in revenue through June 2022, up 5% from the same period in 2021. But the exciting part is the data center business.

The REIT adapted its expertise in storing sensitive files and business information to digital data centers. That side of the business generated revenue of $1 billion in the first half of 2022, up from just $775 million in 2021. That’s a 33% growth. The new digital business will soon overtake the almost 70-year-old analog business.

Overall, Iron Mountain had $1.83 per share in adjusted working capital (AFFO), a REIT-specific cash flow metric. Management estimates that full-year 2022 AFFO per share will be between $3.70 and $3.80. That puts the multiple at around 14 based on the recent share price of around $54. In comparison, digital real estatea data center competitor, trades for about 19 times its AFFO.

Even better, the dividend yield is 4.7%. That means you get the peace of mind of the analog storage business, the growth prospects of the data center business, and nearly 5% cash back every year.

Blackstone Mortgage Trust

Blackstone Mortgage Trust is a mortgage REIT. Unlike other REITs, mortgage REITs do not own or lease real estate. Typically, they borrow money with short-term debt and use it to buy longer-dated mortgages or mortgage-backed securities (MBS). Because of the different maturities and different credit ratings, the mortgages pay higher yields than the short-term cost of debt, and the REIT earns on the spread.

In good times, mortgage REITs are able to continuously borrow money at low interest rates, buy mortgages with enough diversification not to worry about default risk, and then pay huge dividends to shareholders. It’s not uncommon for a mortgage REIT to have a dividend yield in excess of 10%. Blackstone Mortgage’s is on the low end, at around 8.2%.

The problem is when interest rates rise. Mortgage REITs can get bogged down when they have to reallocate debt to higher and higher interest rates, and eventually the new short-term debt costs more than the mortgages they bought years ago are paying off.

One reason Blackstone Mortgage has a lower dividend yield than its peers is the types of mortgages it buys. Blackstone Mortgage buys corporate bonds with variable interest rates. This means that when interest rates rise, so does revenue. You can sit back and collect more than 8% per year without worrying (as much) about interest rate risk.

Macerich

Macerich owns and operates regional shopping centers. It’s not the kind of business I’d normally get excited about — malls don’t exactly evoke visions of growth and modernity — but it has a 5.8% dividend yield and trades at just 75% of its book value. so why not take a look?

Macerich specializes in premier shopping malls, so-called “town centers,” located in large urban and suburban areas. The REIT doesn’t actually own the malls where you would walk into a department store and buy your dad a Father’s Day tie — it owns huge outdoor malls that also have gyms, hotels, expensive restaurants, and other amenities nearby.

The strategy is working well so far. The REIT added 900,000 square feet of new stores in 2021, and 2 million square feet of new stores signed leases to open over the next three years. Debt is down $1.7 billion from 2020. And the REIT is strategically divesting smaller B-B malls to focus on A-B malls in major cities; it raised $470 million in 2021 through the sale of B-class malls, has raised $2.2 billion since 2013, and is expected to grow over $100 million more.

Macerich’s valuation multiples are low and the dividend yield is high because investors are looking at malls (as I initially did) and thinking “dead business.” But if it’s able to keep producing cash flows with its new strategy, it’ll make investors who dig a little deeper pretty happy.

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