Real estate investment trusts (REITs) buy many properties, rent them out, and split the rental income with their investors. US REITs must also pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate.
That simple business model typically makes REITs a solid 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 appeal as fixed-income instruments as yields on risk-free CDs and Treasury bills soared above 5%.
But with interest rates set to fall in the near future, savvy investors should jump back into REITs before the yield-hungry bulls return. I think these four resilient REITs are worth buying right 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 United States, the United Kingdom and Europe, and leases them to more than 1,500 tenants across 90 industries. Its key tenants include recession-resistant retailers such as Walmart, 7-Eleven, Walgreensand Dollar tree.
Some of its major tenants have had to deal with store closures in recent years, but it has still maintained a high occupancy rate of more than 96% over the past three decades. It pays its dividends monthly and has increased its payout 126-fold since its IPO in 1994. It currently pays an attractive forward yield of 5% and its stock looks like a bargain at 16 times last year’s adjusted operating funds (AFFO) per share.
2. Properties of Vici
Vici is a REIT that primarily owns casino and entertainment properties in the U.S. and Canada. Its major tenants, which it ties tightly to with multi-decade leases, include Caesar’s Entertainment, MGM Resorts, Penn Entertainmentand Casinos of the centuryIt has also maintained an impressive 100% occupancy rate since its IPO in 2018.
Vici cut its dividend during the peak 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% quarterly and its stock still looks cheap at 16 times its prior AFFO.
3. STAG Industrial
STAG Industrial is a REIT that owns 573 industrial properties in 41 states. Its major tenants include: Amazon, FedExand XPOand closed 2023 with a high occupancy rate of 98.2%. Many of its properties are used as e-commerce fulfillment centers, and that foundation could make it a less macro-sensitive investment than commercial REITs or brick-and-mortar retailers.
STAG pays monthly dividends and has consistently increased its payout each 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 companies. Its major clients include technology giants such as IBM, Oracleand Target platformsIt operates more than 300 data centers in 50 metropolitan areas around the world, and the secular expansion of the cloud and artificial intelligence (AI) markets should continue to drive its long-term growth.
Digital Realty’s year-end occupancy rate fell from 84.7% in 2022 to 81.7% in 2023 as high rates and other macroeconomic factors slowed cloud market expansion. It trades at 23 times last year’s core FFO per share, making it a bit more expensive than the other REITs on this list, and it pays a lower forward dividend yield of 3.3% quarterly. It also didn’t raise its dividend last year as its growth cooled.
But despite those challenges, Digital Realty could still represent a good way to simultaneously benefit from the recovery of the REIT sector and the expansion 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 director of market development and spokesperson 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 Promise to Be a Good Buy in September was originally published by The Motley Fool