3 High Dividend Stocks to Buy Before They Become Too Expensive

I’m Susan Dziubinski with Morningstar. Real estate investment trusts, or REITs, dramatically underperformed the broad market during the past two years as interest rates rose and remained elevated. As a result, real estate has been one of the most undervalued sectors for quite a while.

But REITs have staged a mini-rally lately as bond yields have fallen. And REITs should rally further once the Federal Reserve begins cutting interest rates; Morningstar expects the first rate cut to happen in September. REITs therefore not only offer handsome yields today, but appreciation potential, too.

So today, we’re looking at three undervalued REITs that Morningstar’s analysts like. In fact, these three REITs are among our analysts’ top stock picks for the third quarter.

The first undervalued REIT on our list is also the highest-yielding: Kilroy Realty KRC. Shares of this office REIT have lost half of their value since the onset of the pandemic, even though the company’s net operating income has increased materially during that time. Yes, Morningstar acknowledges the uncertainty surrounding the future of office real estate, and we do believe the environment will remain challenging in the near-to-medium term. But we also think the selloff has been overdone and the market doesn’t recognize the value of Kilroy’s non-office-related assets and land bank. Kilroy has a high-quality portfolio, with an average building age of 11 years, compared with 34 years for other office REITs. As a result, it should benefit from the flight-to-quality trend in office space. Kilroy Realty’s dividend yield is around 6%, and we think shares are worth $59.

The second undervalued REIT on our list is Realty Income O, which offers a dividend yield above 5%. Morningstar thinks Realty Income’s portfolio should enjoy stable rental payments in nearly any economic environment. That’s because most of the company’s tenants are defensive retailers, like pharmacies and gas stations, which generally produce stable sales even during recessions. Plus, the firm’s high coverage ratio helps tenants maintain rent payments even if they experience a slowdown in sales. We think the current stock price significantly undervalues Realty Income’s portfolio of stable assets. We think Realty Income’s shares are worth $75 each.

The final undervalued REIT on our list is Ventas VTR. Ventas yields just over 3%, so it’s not the most attractive name on our list for income investors, but investors who like good growth stories should consider Ventas. Morningstar expects the firm’s portfolio of senior housing assets to produce double-digit net operating income growth for the next several years, given the combination of strong demand growth and limited supply growth. Plus, the company’s medical office and life science portfolios should produce recession-resistant revenue. We think shares are worth $69.

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Morningstar senior analyst Kevin Brown and analyst Suryansh Sharma provided the research behind this segment.

Watch “2 of the Best Undervalued Stocks to Buy in a Top-Performing Sector” for more from Susan Dziubinski.