Real estate is a powerful asset class, and one that often competes with stocks and bonds. Most of the world’s ultra-wealth have either made their money in real estate, or keep a significant chunk of their net worth in the real estate market, given its large market cap.
In today’s capital markets, there are plenty of companies that offer exposure to the real estate sector with the liquidity of a company on a publicly-traded stock exchange. These opportunities cover a variety of niches within the real estate world, and nearly all offer some great income potential via high dividend payments right now. Best of all, real estate income tends to have an advantage over taxable income from other sources as well.
These are the top five real estate companies:
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Best Real Estate Stock #1: Prologis (PLD)
Prologis (PLD) is one of the world’s premier industrial REITs. With over 965 million rentable square feet in properties across 19 countries, Prologis mostly focuses its real estate investment property portfolio on logistics facilities such as ports and warehouses. The company divides its properties into business-to-business spaces and retail/online fulfillment centers.
These niche spaces provide the company with a tremendous source of growth. Earnings are up 41 percent in the past year, and revenues are up 29 percent showing that cash flow is strong. And with profit margins of 45 percent, this looks like a publicly-traded REIT that will continue to provide shareholders with tremendous value.
The company’s growth also offsets one of the lower dividends among REIT stocks. At 2.4 percent, the company’s yield isn’t that exciting. But it did just get raised from $2.17 to $2.32 per year, and growth rates in the dividend are a key factor to watch for long-term real estate investors.
Best Real Estate Stock #2: Annaly Mortgage (NLY)
Annaly Mortgage (NLY) is a mortgage REIT. That’s a niche in the space that just buys residential mortgages as opposed to developing or owning real estate properties like Equity Residential or another housing-themed equity REIT. Residential REITs are a solid starting point for investing in real estate via REITs.
Annaly focused on agency mortgage-backed securities and loans, which gives the company considerable safety in the event of another housing crisis. In order to provide a hefty dividend, Annaly uses leverage to buy up mortgages, earning its money on the spread between the cost to borrow and the interest rate of the mortgage. As a result, the company’s total debt far exceeds its market cap.
As the company’s earnings have been variable, so have its dividends. And even with a drop in the dividend from $1.00 annually to $0.88, the dividend yield is still a hefty 13.3 percent at today’s prices, well above the historical average.
As the housing space looks like one of the better investment opportunities for the next few years thanks to robust housing prices, this leveraged play on the sector is likely to continue paying out a hefty yield and remaining one of the highest dividend stocks on the market today.
Best Real Estate Stock #3: Omega Healthcare Investors (OHI)
Omega Healthcare Investors (OHI) focuses on long-term healthcare facilities, such as nursing and assisted living communities. Omega uses a triple-net leasing arrangement, letting a number of different healthcare companies operate their owned-facilities.
In total, the company has over 950 total facilities in 41 states, as well as properties in the United Kingdom. The company’s niche in the growing healthcare sector of the economy will likely continue to deliver superior returns over time.
That’s supported by the company’s earnings growth of 29 percent and solid 38 percent profit margins. The demographic trends supporting this senior housing real estate niche should continue to deliver growth, making it a worthwhile place when investing.
Shares have yet to fully recover from the stock market selloff in the first half of 2020, which has helped push up the current yield on shares to 8.8 percent. The company just raised its annual dividend by a penny to $2.68 per share, and has a buyback program in place which should allow for today’s traders to enjoy capital gains as well.
Best Real Estate Stock #4: Crown Castle International (CCI)
Cell towers are ubiquitous these days. But they don’t just pop up as a utility, per se. Rather, there’s an entire ecosystem of finding optimal locations for cell towers, which are then leased out. That’s why you may see standalone towers, or smaller mini-towers attached to the side of a building. It’s all part of the complexity of 5G deployment.
One big player in this oft-overlooked space is Crown Castle International (CCI). They lease out the spaces and negotiate contracts, usually with automatic escalation clauses.
But the best thing about the company? It’s the fact that it’s structured as a real estate investment trust that currently pays out about a 2.8 percent yield. Even better, that yield has been growing—but not as fast as the share price!
A look at the stock chart over the past few years shows how powerful that is. The cell tower REITs have been huge performers. That’s before the 5G rollout occurred. 5G towers are now being constructed.
It’s a simple to understand business model that takes a safer approach to this fast-growing space without worrying about who has the best chips, which smartphone company will change their suppliers and so on. In any market, there’s a utility-like play, and Crown Castle is one of the leaders in 5G infrastructure. REIT investors who want high income as well can also look at the company’s convertible preferred shares.
Best Real Estate Stock #5: Public Storage (PSA)
It’s no secret that people tend to have more things than they can fit in their homes. That’s created a huge opportunity in self-storage plays. Public Storage (PSA) has nearly 2,500 facilities in 38 states, with over 170 million rentable square feet. And the company has partnered to build out storage facilities abroad.
With minimal costs and monthly fees, this is one of the more profitable real estate plays. The company sports a 51 percent profit margin. Revenue and earnings growth have been flat in the past year, and may stay that way for a while as the economy retrenches, but as long as the company can maintain its profit margins, and grow its net income, it should still deliver excellent returns to shareholders.
Shares pay out $8.00 in dividends per year, for a yield just over 4 percent right now. While that’s not a huge yield, the trends behind self-storage should work out favorably for shareholders over time.
What is the Best Investment—Stocks or Real Estate?
That depends on your goals and your timeframe. For steadier and higher dividend income levels than common stocks, real estate investing can often provide a better return than most stocks. And real estate can be bought with greater leverage—a 20 percent down payment on a rental property comes out to 5:1 leverage, which you just can’t get with stocks. That’s why the housing market has been an attractive place to invest as well for those seeking rental income.
Why are REITs Going Down?
REITs in general will trend down in bear markets, when nearly all assets, including real estate assets, get sold off as individual investors move to cash and short-term fixed income for safety. REITs can also sometimes decline if interest rates drop, as there’s a perceived lower return going forward there, however, that fear usually proves short-lived as lower rates mean that REITs can refinance their operations at lower rates as well.
What are the Best REITs to Buy?
That depends on what sector of the REIT space you’re looking at. While you could buy a fund or real estate ETF, we believe that these are some of the best overall REITs, and the leaders in their respective niche.
Can You Lose Money in a REIT?
As with any investment, it’s possible to lose money. REITs can decline in value on market fears, which tend to whipsaw interest rates. And in a bear market, REIT prices can radically drop along with the prices of common stocks. However, given the higher yields on REITs, patient investors who wait for such a drop are unlikely to lose money over time. That’s also true with a diversified play like a REIT ETF or REIT mutual fund.
Are REITs Safe During a Recession?
While valuations may drop, real estate values never go to zero, making them an ideal buy during a recession when prices are low and cash flows and yields are higher. Each recession has a different weakness to it, however, which may impact parts of the market differently. For instance, the Covid recession of 2020 has been weak for commercial real estate, including office buildings, as stores closed and work-from-home trends rose. Make sure you understand the composition of any REIT ETF you buy.