Real estate investment trusts (REITs) buy lots of properties, rent them out, and share the rental income with their investors. U.S. REITs must also pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate.
That simple business model generally makes REITs a sound investment for most income investors, but rising interest rates weighed on the sector for two reasons. First, higher rates made it more expensive to buy new properties. Second, REITs lost their luster as income players as yields on risk-free CDs and T-bills soared above 5%.
But with interest rates set to fall in the near future, smart investors should get back into REITs before the yield-hungry bulls storm back. I believe these four resilient REITs are worth buying now: Real estate income (NYSE: O), Vici properties (NYSE: VICI), STAG Industrial (NYSE: STAG)And Digital Real Estate Trust (NYSE: DLR).
1. Real estate income
Realty Income is one of the largest REITs in the world. It owns 15,450 properties in the U.S., U.K. and Europe and leases them to more than 1,500 tenants in 90 industries. Top tenants include recession-proof retailers such as Walmart, 7-Eleven, WalgreensAnd Dollar tree.
Some of its best tenants have struggled with store closures in recent years, but the company has still maintained high occupancy rates of more than 96% over the past three decades. It pays a monthly dividend and has increased its payout 126 times since going public in 1994. It currently pays an attractive forward yield of 5%, and the stock looks like a bargain at 16 times last year's adjusted funds from operations (AFFO) per share.
2. Vici properties
Vici is a REIT that owns primarily casino and entertainment properties in the U.S. and Canada. Its key tenants, which it carefully locks into multi-decade leases, include: Caesar's Entertainment, MGM Resorts, Penn EntertainmentAnd Century CasinosIt has also maintained an impressive 100% occupancy rate since its IPO in 2018.
Vici cut its dividend during the height of the pandemic in 2020 and 2021, but has increased its payout over the past two years. It pays a high forward yield of 4.9% per quarter, and its stock still looks cheap at 16 times its trailing AFFO.
3. STAG Industrial
STAG Industrial is a REIT that owns 573 industrial properties in 41 states. Top tenants include Amazon, FedExAnd XPOand it ended 2023 with a high occupancy rate of 98.2%. Many of its properties are used as e-commerce fulfillment centers, and that base could make it a less macro-sensitive move than brick-and-mortar retail or commercial REITs.
STAG pays monthly dividends and has consistently increased its payout every year since its IPO in 2011. It currently pays a forward dividend yield of 3.7% and trades at just 18 times last year's core FFO per share.
4. Digital Real Estate Trust
Digital Realty Trust is a REIT that leases data centers to more than half of the Fortune 500. Key clients include tech giants such as IBM, OracleAnd Meta platformsThe company operates more than 300 data centers in 50 metropolitan areas around the world, and secular expansion of the cloud and artificial intelligence (AI) markets should continue to drive long-term growth.
Digital Realty’s year-end occupancy rate fell to 81.7% in 2023 from 84.7% in 2022 as high rates and other macro headwinds hampered cloud market expansion. It trades at 23 times last year’s core FFO per share, making it slightly more expensive than the other REITs on this list, and it pays a lower 3.3% quarterly forward dividend yield. It also didn’t raise its dividend last year as growth cooled.
But despite these challenges, Digital Realty could still be a good way to simultaneously benefit from the REIT sector's recovery and the growth of the data center market.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon, Meta Platforms, Realty Income and Vici Properties. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, FedEx, Meta Platforms, Oracle, Realty Income, Stag Industrial and Walmart. The Motley Fool recommends International Business Machines, Vici Properties and XPO. The Motley Fool has a disclosure policy.
4 REIT Stocks That Scream Like Bargains in September was originally published by The Motley Fool
