Dividend stocks have generally underperformed their non-dividend counterparts in recent years, and that’s especially true when it comes to real estate investment trusts, or REITs. There are several reasons for this, including the interest rate environment, lingering effects of the COVID-19 pandemic, and other factors.
However, now could be a smart time for long-term investors to consider adding some of the most solid REITs to their portfolios. Not only can this provide an excellent income stream, but these REITs could produce market-beating total returns over the next five to 10 years.
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A tailwind for REITs?
As mentioned, a primary reason for the real estate sector’s generally weak performance in recent years has been the interest rate environment. Generally speaking, REITs benefit when rates are low (or falling), and for a few reasons:
- Lower interest rates reduce borrowing costs, and most REITs borrow money to help fuel growth.
- Lower interest rates tend to lead to lower yields from income-focused stocks like REITs. Since price and yield are inversely related, this puts upward pressure on REIT prices.
- Commercial property values tend to be higher in lower-rate environments. Without getting too deep into the mathematics, when risk-free instruments like Treasury securities offer lower rates, the values of income-producing properties tend to rise.
3 top-tier REITs for the long term
There are dozens of excellent REITs for long-term investors. But here are three in particular that are among the best in the industry and could be great long-term investments for your portfolio:
Realty Income Corporation (O +0.95%) owns more than 15,000 single-tenant properties, most of which are occupied by recession-resistant businesses such as drug stores, casual dining establishments, and others. It has averaged a 13.6% total return annually since its 1994 NYSE listing and has a 5.2% dividend yield at the current price. Plus, its business is built for consistent income growth, which has enabled management to increase the dividend for 114 consecutive quarters.
Today’s Change
(0.95%) $0.59
Current Price
$62.38
Key Data Points
Market Cap
$58B
Day’s Range
$62.10 – $62.67
52wk Range
$54.38 – $67.94
Volume
79K
Avg Vol
6.1M
Gross Margin
49.62%
Dividend Yield
5.24%
Prologis (PLD +0.89%) is one of the largest real estate owners in the world, with a portfolio of more than 1.3 billion square feet of leasable industrial space. If you’ve ever seen one of those massive Amazon (AMZN +0.60%) distribution centers, that’s an example of what Prologis invests in. The company has one of the highest credit ratings in the real estate sector (which means lower borrowing costs), and it has a yield of roughly 3% right now.
Last but not least, Equinix (EQIX +0.62%) is the largest data center real estate investment trust and is getting some incredible tailwinds from the AI infrastructure buildout. Its properties are considered the gold standard for interconnections and colocation, and recent bookings show a surge in demand. It isn’t the highest-paying stock on this list with a roughly 2% yield, but it has massive growth potential as AI investment continues to rise.
Matt Frankel, CFP has positions in Amazon, Prologis, and Realty Income. The Motley Fool has positions in and recommends Amazon, Equinix, Prologis, and Realty Income. The Motley Fool has a disclosure policy.
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