Real estate investment trusts, or REITs, are an investment that trade on an exchange much like a stock. But unlike a stock, they must have some tie to the world of real estate. There are a variety of REITs covering all sorts of specialized properties and strategies.
For investors interested in real estate, REITs are a good place to get started and comfortable with the asset. Best of all, REITs are structured to pay out at least 90 percent of their earnings as ordinary income, making them great passive income plays in today’s low-yield world. Most dividend-paying stocks don’t have a payout ratio anywhere near that high. Just remember, that dividends are taxable income!
We’ve identified the seven best REIT stocks to buy now out of the universe of publicly-traded REITs. This list is based on a few key factors. REIT investing should start with the leaders in their respective sub-niche, only owning the best assets. That also means avoiding smaller REITs that trade like penny stocks.
Some have large dividend yields, others have lower ones, but have some growth ahead of them that will likely improve both the share price and the dividend yield over time.
Best REIT #1: Realty Income (O)
Realty Income (O) owns a number of commercial and retail properties and operates under triple-net leases. This means the tenants pay a lower rent, but they’re also responsible for things like utilities and insurance. That means Realty Income is pretty close to a purely pass-through real estate play.
That allows the company to stay operationally lean, while also providing for sizeable dividend payouts as well. Shares currently pay out $2.80 annually, making for a 4.5 percent dividend yield right now.
While that isn’t a huge yield in the REIT space—some can be higher than 10 percent—the company is a dividend aristocrat that has managed to up its payout every year. And it looks like one of the safest plays in commercial real estate right now thanks to its long dividend history.
And, while most dividends are paid out quarterly, Realty Income pays out its dividend monthly. That makes it an optimal play for investors seeking current income without the unevenness of a payment every 90 days. All in all, it’s a great company for getting started investing in the real estate space.
Best REIT #2: Omega Healthcare Investors (OHI)
Omega Healthcare Investors (OHI) focuses on long-term healthcare facilities, such as nursing and assisted living communities. As with Realty Income, 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.
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.
Best REIT #3: 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. (If you’re interested in catching profits from the 5g technology wave, read our best 5g stocks article.)
Best REIT #4: 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 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 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 right now, this leveraged play on the sector is likely to continue paying out a hefty yield and remaining a high dividend stock.
Best REIT #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, 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.
Best REIT #6: Digital Realty Trust (DLR)
A play on technology trends, Digital Realty Trust (DLR) owns and operates data center, colocation, and interconnection properties around the world.
With the rise in cloud and information technology services, these data centers operate as the hub of global commerce. That makes DLR a landlord to some of the most valuable real estate in the world, in terms of how profitable the spaces can be, and one with some strong growth trends behind it for long-term investors.
Shares currently pay out $4.48 annually, for a yield of just over 3 percent. And that’s after an increase from $4.36. We expect tech companies will keep paying for their data center needs, and that the company will keep bringing in more revenues as a result. While the company’s revenue slid nearly 10 percent in the past year, earnings rose by nearly 92 percent as the company focused on higher profitability.
Best REIT #7: 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 investments 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 REIT that will continue to provide shareholders with tremendous value.
The company’s growth also offsets one of the lower dividends in the REIT space. 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 investors.
Frequently Asked Questions
Are REITs Better than Stocks?
In some cases, yes. Remember, REITs are different than stocks, and depending on your portfolio and diversification needs may be better. For instance, an investor looking for current income will appreciate REITs more than a younger investor looking to massively grow their portfolio from capital gains.
In many cases, REITs may even be better than a rental property as well, as investors get the pass-through cash flow, rather than having to deal with the headaches of being a landlord. But REITs allows income investors to get started with real estate investing at a small fraction of the cost of buying a property outright.
Are REITs Good in a Recession?
REITs can be a good buy during a recession as they offer a portfolio of properties at a fraction of what a real estate property could be bought for.
Depending on the recession and how it unfolds, however, investors need to make sure they’re selecting REIT shares that aren’t exposed to the biggest dangers involved. For instance, investors looking at REITs during the housing crisis would have wanted to avoid the mortgage REITs until the foreclosure wave was peaking. Knowing what you’re investing in, and how a niche of the real estate market can perform, is crucial.
Are REITs a Good Long-Term Investment?
Absolutely! For younger investors, the high yield on REITs can be reinvested to compound the share growth. And over time, appreciating asset values of all types of real estate is likely, which in turn should lead to some capital gains over time as well, even if the overall pace of REIT appreciation tends to be lower than that of the stock market as a whole.
REIT investors have historically been rewarded thanks to the lower volatility and higher yields relative to other stocks. High-net-worth investors can even invest in private REITs, although there’s nothing wrong getting started with ones that trade on a stock exchange.
Do All REITs Pay Dividends?
All REITs are supposed to pay dividends, out of their operating income. However, sometimes a REIT may not have operating income, so it may reduce or suspend its dividend. But even REITs in growth areas, like data center REITs or cell tower REITs, pay out their net income as dividends, even if it’s low due to their expanding operations.
Can I Just Buy a Real Estate ETF?
Yes, you can buy an ETF or mutual fund that focuses on real estate investments as well. There are plenty of REIT ETFs out there. Some REIT ETFs cater to a large basket of different types of properties, while other REIT ETFs focus on a smaller niche. As with investing in any fund or ETF, however, you won’t have the power to pick the specific positions that may be best for you. You’ll be stuck with whatever the portfolio manager decides to buy, and may end up with some poorly-performing equity REITs as a result. And the expense ratio of these funds can be quite high.