Real estate investment trusts (REITs) are a fantastic way to branch into the world of real estate investing while earning consistent income through dividends. Since REITs are required to pay 90% or more of taxable income in the form of dividends, they’re a reliable way to earn higher-than-average dividend yields on investment.
These special real estate stocks can be a particularly attractive investment when the market is down because dividend yields go up as share prices go down. That makes today’s market dip a fantastic time to jump in.
But considering there are 200 publicly traded REITs to choose from, it can feel overwhelming to know where to start. If you’re looking for solid REIT picks that offer consistent returns, a strong track record, and fantastic growth opportunities, look no further than Digital Realty Trust (DLR 0.02%), Prologue (PLD 0.49%)and Medical Properties Trust (MPW -0.81%).
Here’s a closer look at the stocks three Motley Fool contributors believe are great starter REITs to hold for the long haul.
Digital Realty Trust offers a data-centric spin on traditional REITs
Kristi Waterworth (Digital Realty Trust): When it comes to starting REITs, there are few I’d recommend more highly than Digital Realty Trust. Although it’s not exactly what you might think of when it comes to a REIT, Digital Realty Trust has a long track record of success and is serious about long-term planning.
Digital Realty Trust is a data center REITso instead of focusing on renting real estate to companies or individuals, it leases out server space to companies in need of additional storage or computing power from approximately 290 data centers spread across the globe.
Free cash flow has increased steadily since 2014 and the company has been putting that money to good use expanding the business in markets that have ample growth potential. The acquisition of Teraco, a South African data center and interconnection services provider, on Aug. 1 further cemented the REIT’s position on the African continent. Digital Realty Trust now controls data centers in Kenya, Mozambique, Nigeria, and South Africa, effectively serving the entire expanding African market.
International Business Machines, Oracle, Meta Platforms, Microsoft‘s LinkedIn, Comcast, JPMorgan Chase, Verizon Communicationsand AT&T call Digital Realty Trust’s server farms home. It’s also a forward-looking company when it comes to the planet, as it continues to expand its use of renewable energy for data centers, with 119 global data centers 100% powered by renewables.
As if this weren’t enough, dividend payouts have grown consecutively over the last 16 years, from $1 per share in 2005 to $4.64 as of 2021. That’s a 10% compound annual growth rate with no signs of stopping as the world continues to pursue increasingly more digital solutions to real-world problems.
Taking industrial real estate to a new level
Liz Brumer-Smith (Prologue): Prologis is one of the largest REITs by market capitalization, having interest and ownership in over 4,700 industrial properties in 19 countries. This giant REIT has quickly made a name as a global leader in logistics, serving the fast-growing e-commerce industry by leasing warehouse, distribution, and last-mile centers to roughly 5,800 customers — including major tenants like Amazon, FedEx, Home Depotand Walmart.
The last decade has been incredibly strong for the company, having produced a nearly 18% annualized return outperforming the S&P 500. But the coronavirus pandemic accelerated its growth tremendously. Low supply, high barriers of entry, and increased demand have created the perfect storm for record rental growth. In the second quarter of 2022, rents grew 45.6% year over year and it had a less than 3% vacancy rate.
And its growth is nowhere near over. It’s currently in the process of acquiring Duke Realtya smaller industrial REIT, and is expecting to spend an additional $1.2 billion to $1.7 billion in acquisitions this year on top of that. It’s also extremely well funded with $5.2 billion in cash and cash equivalents and a healthy ratio of debt to earnings before taxes, interest, debt, and amortization (EBITDA) of 4.2 times.
Being one of the largest, most popular, and most reliable REITs comes at a cost. Currently, it’s trading around 29 times its FFO, which means it’s trading at a premium compared to other REITs. Its dividend return is also low, just over 2%. But it’s hard to compare Prologis’ track record, financial position, growth opportunities, and clear demand to other REITs, and its premium is well worth it for the long haul.
Solid returns, whether the market is healthy or not
Mike Price (Medical Properties Trust): Medical Properties Trust’s stock has been crushed this year, although it has recovered a little since it was down by almost 40% through mid-June. The business, meanwhile, is still chugging along.
Medical Properties is a good mix of conservatism and growth. It leases real estate to hospitals, which are recession- and inflation-resistant. Because its tenants are so reliable, it is able to leverage the balance sheet and grow.
The REIT has increased its gross investment properties from under $2 billion 10 years ago to over $17 billion today. Revenue is up from $200 million to $1.6 billion over that same period. Most of that growth was funded by debt and the current hoard stands at over $10 billion. However, less than a third of the debt comes due over the next three years and the vast majority of it already has low fixed rates.
That mix led to good returns prior to this year’s REIT market wash-out. The REIT’s total stock return since inception in 2005 is 661%, compared to 341% for the healthcare REIT market index. The REIT beat that index in the previous three-, five-, and 10-year periods as well.
A general drop in real estate prices and increase in interest rates will harm Medical Properties just as it will every other REIT, but it certainly won’t kill 30% of its value (the amount the stock has dropped this year). Medical Properties is uniquely set up to benefit from rising inflation and the majority of the debt on its balance sheet is immune to rising interest rates.
Medical Properties is trading for just 1.14 times book value and has a forward dividend yield of 6.74%. It is a great starter buy for income investors.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Kristi Waterworth has positions in Amazon and FedEx. Liz Brumer-Smith has positions in Digital Realty Trust, Duke Realty, and Prologis. Mike Price has positions in Home Depot and Medical Properties Trust. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, FedEx, Home Depot, Meta Platforms, Inc., Microsoft, Prologis, and Walmart Inc. The Motley Fool recommends Comcast and Verizon Communications. The Motley Fool has a disclosure policy.