The Smartest High-Yield Dividend Stocks to Buy With $1,000 Right Now

The past few years have been challenging for the commercial real estate sector. Higher interest rates to combat inflation have weighed on real estate values. They've also made it more expensive for real estate operators to make acquisitions and fund development projects.

However, rates should finally start coming down this year if inflation continues to slow. That would be a boon for real estate investment trusts (REITs) because it should boost the values of their portfolios (and stock prices) while enhancing their ability to expand.

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Three of the smartest REITs to buy right now to cash in on this catalyst are EPR Properties (NYSE: EPR), Realty Income (NYSE: O), and Mid-America Apartment Communities (NYSE: MAA). They each offer high dividend yields and upside potential.

An exciting investment opportunity

EPR Properties currently pays a monthly dividend yielding 6.9%, well above the S&P 500's (SNPINDEX: ^GSPC) 1.2% yield. At that rate, it could turn a $1,000 investment into $69 of annual dividend income. Higher interest rates have helped drive its yield higher. Its shares are down more than 11% since rates started rising three years ago.

Higher rates have also increased EPR Properties' cost of capital, making it too expensive for the REIT to issue new stock to fund acquisitions. Because of that, it has been internally funding its growth with post-dividend free cash flow, noncore property sales, and its strong balance sheet. Those capital sources allow it to invest $200 million to $300 million per year into new experiential real estate, like eat-and-play venues, fitness and wellness locations, and experiential lodging properties. That investment rate can support 3% to 4% annual growth in its adjusted funds from operations (FFO) per share and a similar yearly pace of dividend increases (it hiked its payout by 3.6% last year).

As rates fall and its stock price rises, EPR Properties can ramp up its investment pace to grow its adjusted FFO and dividends at higher rates. That could enable it to deliver even higher total returns than the double-digit rate it can currently achieve when adding its dividend yield to its growth rate.

Wise workarounds

Realty Income's stock currently yields 5.7%, due in part to the roughly 25% decline in the value of its stock from rising interest rates. The diversified REIT has also continued to steadily increase its dividend. It recently extended its growth streak to 110 quarters in a row.

Higher interest rates have forced Realty Income to be more creative in funding its growth. Last year, it capitalized on the opportunity to acquire fellow REIT Spirit Realty in a highly accretive $9.3 billion deal. It didn't need to access the capital markets to fund the transaction because it exchanged its stock for the REIT's shares and assumed its existing debt with low in-place rates.

The REIT also has a plan to get around the continued challenging capital market conditions this year. It's launching a private capital fund management platform. That strategy will provide access to less-volatile equity capital while supplying it with management fee income. Meanwhile, if rates fall and its stock price rises, the REIT can ramp up its acquisition rate by issuing more stock to fund additional accretive new investments.

The recovery is here

Shares of Mid-America Apartment Communities (MAA) have slumped more than 30% from their peak a few years ago. That has helped drive the apartment REIT's dividend yield up to 3.8%.

Interest rates have a lagging impact on the apartment sector. Low rates from the pandemic (and a significant shift in housing demand) drove an apartment building boom across the Sun Belt region, where MAA focuses. As a result, there has been a surge in new apartment supply over the past few years as developers wrapped up projects they approved when rates were lower. That has kept a lid on rental rates.

However, higher interest rates in more recent years have resulted in developers starting far fewer projects. Because of that, there will be much less new apartment supply in the coming years, while demand should remain strong. That dynamic is already reigniting rent growth, which MAA expects "will become increasingly evident late this year and into 2026." Rising rental income should provide a big boost to the REIT's share price.

On top of that, the financially strong MAA has been going on the offensive as others have become more defensive. It has seven development projects under construction that it should complete over the next three years. Meanwhile, it expects to start three to four more developments this year and continue to actively seek out acquisition opportunities. These investments, along with reaccelerating rent growth, position the REIT to produce strong total returns in coming years.

A smart time to buy these recovering REITs

Higher interest rates have weighed on the values of EPR Properties, Realty Income, and MAA, which has driven up their dividend yields. With rates likely to start falling in the coming months, these REITs look like smart buys right now. They can deliver attractive and growing streams of dividend income, while also potentially providing meaningful stock price appreciation as the market rebounds.

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Matt DiLallo has positions in EPR Properties, Mid-America Apartment Communities, and Realty Income. The Motley Fool has positions in and recommends Mid-America Apartment Communities and Realty Income. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.