Stocks and bonds have largely rewarded market denizens since the Great Recession’s market nadir in 2009, but investors great and small may be pondering how much leg the current rally has left. Real estate investment trusts (REITs) might be the asset class investors need to thread the needle in this tenuous bull market.
This summer, prominent hedge-fund king Ray Dalio wrote that market paradigms are shifting (opens in new tab), and the next decade’s prospects are for slow growth and chronically soft interest rates. He believes the world’s central banks, including America’s Federal Reserve, “doing more of this printing and buying of assets will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.”
While Dalio suggests investors might add gold to their portfolios, they might want to start researching REITs to buy, too. That’s because real estate also has been a classic hedge against inflation, and it tends to benefit from low interest rates.
Another upside: REITs can throw off substantial income; gold does not. By law, real estate investment trusts must distribute 90% of taxable income to shareholders through dividends. But the ultimate hedge is finding REITs that reliably (and, when possible, aggressively) increase their payouts, as that will keep the dividend from actually losing value due to inflation over time.
Here are seven REITs to buy for investors who are interested in dividend growth. These real estate companies are poised to sustain and improve their cash distributions through the possibly sluggish, low-interest-rate future that some experts are predicting.
Data is as of Oct. 6. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $6.8 billion
- Dividend yield: 3.6%
- 5-year average annual dividend growth: 19.7%
CubeSmart (CUBE (opens in new tab), $35.19) owns and/or operates a growing national chain of more than 1,150 self-storage facilities – a prosaic but steady front of the REIT world that offers a dike against recessionary tides. The company serves not only ordinary households, but businesses and even boat owners. Thus, it harbors a diverse clientele spread across 38 states – with large concentrations in Florida, Illinois, Texas, New York and California – and the District of Columbia.
CubeSmart, the third-largest self-storage yard operator in the nation by annual revenue, went public back in 2004. CUBE did cut its dividend back during the Great Recession, but it began a spree of aggressive dividend growth in 2011. The payout has re-emerged from a post-recession 2.5 cents per share in 2010 to 32 cents today.
What’s important is that funds from operations (FFO, an important REIT profitability metric) have been there to support these hikes. The company’s adjusted FFO (AFFO) has grown for six straight years. Second-quarter AFFO of 42 cents per share was up a penny year-over-year. And management is guiding for full-year AFFO of $1.66 to $1.68 per share, up from last year’s $1.64.
In July, Moody’s affirmed CubeSmart’s debt at an investment-grade Baa2 senior unsecured rating, saying the REIT has “good financial flexibility and modest use of leverage as measured by net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization).”
Moody’s also lauded CubeSmart’s “experienced management team and strong operating expertise.” It’ll need that in the competitive self-storage business, which spans an estimated 48,000 to 52,000 facilities in the U.S. and has low barriers to entry.
Still, CUBE shareholders can take solace in knowing that the self-storage business also is considered “recession-resistant.” That’s because economic downturns tend to force people to downsize, which sends them packing their extra stuff in CubeSmart’s units. Lower interest rates, should they come to pass, will make the REIT’s rising dividends more attractive, too.
Crown Castle International
- Market value: $57.3 billion
- Dividend yield: 3.3%
- 5-year average annual dividend growth: 26.3%
Investors aware of the ubiquitous use of smartphones and tablets in public might be inclined to buy Crown Castle International (CCI (opens in new tab), $137.92) – the largest owner-operator of U.S. telecommunications assets. The REIT’s communication infrastructure is eye-popping, composed of more than 40,000 cell towers, 65,000 small-cell nodes and about 75,000 route miles of fiber into every major American market.
Its infrastructure helps power AT&T (T (opens in new tab)), Verizon (VZ (opens in new tab)), T-Mobile US (TMUS (opens in new tab)) and Sprint (S (opens in new tab)) communications technologies. So if you see someone using their smartphone, there’s a decent chance Crown Castle is making that possible.
Crown Castle, which yields more than 3%, has been raising its dividend for years. Its most recent dividend hike – a 7% upgrade to $1.125 per share, came last October. Its dividend growth should be well-supported by AFFO, which management forecasts will grow 7%-8% annually for the foreseeable future. (Its second-quarter AFFO jumped 13% year-over-year, and the company expects the full-year figure to hit the high end of its expected range.)
It takes a lot of capital to build out communications networks, and Crown Castle borrows big. Nonetheless, in July, Moody’s Investors Service affirmed its Baa3 (investment-grade) rating on CCI’s senior unsecured credit, citing the REIT’s “robust internally generated cash flows supported by its tower and fiber business.” Moody’s adds, “CCI’s long-term non-cancellable leases with contractual rent escalators provide high visibility into future earnings and stability of cash flows.”
Moody’s does say that if there is a risk to Crown Castle, it is the possibility of unanticipated technological disruptions. For now, though, technology is on CCI’s side. AT&T, Verizon and others are working on a nationwide rollout of “5G” services – the more-powerful telecom technology that will further weave the internet into everyone’s lives. That is powering heavy demand for the REIT’s towers, small cells and fiber assets.
Equity LifeStyle Properties
- Market value: $12.4 billion
- Dividend yield: 1.8%
- 5-year average annual dividend growth: 13.1%
Equity LifeStyle Properties (ELS (opens in new tab), $136.42) owns and operates more than 400 manufactured home communities, RV resorts and campgrounds in 32 states and British Columbia, spanning more than 145,000 sites. With baby boomers hitting retirement by the millions, low-cost manufactured housing and RV parks are in high demand.
You can see it in the company’s results. Its latest guidance for full-year 2019: “normalized” FFO of $4.12 to $4.22 per share. That compares to $3.87 in 2018, and $3.60 in 2017. The company also registered 8% year-over-year FFO growth during the second quarter, to 96 cents per share.
Yes, ELS has a low 1.8% yield that’s actually less than the S&P 500. But that’s not from a lack of dividend growth. It’s just hard for the payout to keep up with the stock price, which has rocketed ahead by more than 90% over the past three years.
But investors who get into Equity LifeStyle now should enjoy higher yields on cost as it continues to hike its payouts in the year ahead. The REIT is well-positioned to catch the growing seniors market; about 10,000 Americans retire every day, and some of them are looking to downsize. Better still, they have nest eggs, pensions and Social Security, helping insulate them somewhat from a potential recession.
- Market value: $25.0 billion
- Dividend yield: 3.5%
- 5-year average annual dividend growth: 4.4%
Realty Income (O (opens in new tab), $78.41) owns more than 5,900 properties in 49 states, Puerto Rico and the U.K., leased out to 265 different tenants across 49 industries. However, it is retail-heavy, with that industry accounting for about 83% of the REIT’s rental income.
It’s no secret what online retail has done to brick-and-mortar retail here in the U.S. – one reason why the stock has waffled for the past few years. But as management noted in its last earnings call, “95% of our rent comes from tenants with a service, nondiscretionary and/or low-price-point component to their business.” Another reason to believe in Realty Income’s model: It deals in “triple-net” leases, which means they’re net of taxes, insurance and maintenance. Realty Income merely collects the rent checks – making its revenues and FFO much more regular and dependable.
And despite retail’s woes, Realty Income is flashing signs of growth. The REIT posted AFFO of 82 cents per share in the second quarter, up from 80 cents in the year-ago quarter. And for the full year, management is targeting AFFO of $3.28 to $3.33 per share, up from $3.19 in 2018.
Realty Income also is the most well-known of the monthly dividend stocks – which is what happens when you brand yourself the “Monthly Dividend Company.” It has paid an impressive 590 consecutive monthly dividends, including 88 consecutive quarterly increases.
Moody’s provides plenty of reason to believe that dividend is safe and will keep growing. “Realty Income’s A3 senior unsecured rating reflects the REIT’s excellent management team and long track record in maintaining a well-capitalized balance sheet with conservative leverage. The REIT’s operationally strong retail portfolio is also well-insulated from e-commerce and shifts in consumer spending, a credit positive.”
- Market value: $8.8 billion
- Dividend yield: 3.7%
- 5-year average annual dividend growth: 25.2%*
STORE Capital (STOR (opens in new tab), $38.05) is a diversified net-lease REIT that invests in “single tenant operational real estate” – hence the name “STORE.” It boasts 2,389 properties that it leases out to 456 customers across all 50 states, with a top-flight 99.7% occupancy as of this writing.
Service companies, such as restaurants, health clubs and movie theaters, make up the largest chunk of its properties at 64%, with the rest in retail (19%) and manufacturing (17%). STOR also focuses on long-term leases, with an average remaining term of 14 years on its existing leases.
STORE Capital’s claim to fame? It’s the only REIT currently held by Warren Buffett’s Berkshire Hathaway (BRK.B (opens in new tab)). Buffett bought his stake back in 2017 and is in fact the second-largest shareholder in the company, after Vanguard.
The REIT passes muster with Moody’s, which is encouraging. “STORE Capital’s Baa2 (investment-grade) credit profile reflects the company’s rapid expansion and growing cash flow stream, generated from its highly diversified, highly occupied portfolio of single-tenant properties with long-term triple net leases and annual rent bumps,” Moody’s wrote in August, adding that the REIT also had a “sound balance sheet.”
STORE Capital has improved its dividend every year since going public in 2014. Its latest hike – a 6.1% bump to 35 cents per share – was announced in early September. The REIT’s profit growth should continue powering future increases. In its second quarter, AFFO came to 45 cents per share (up a penny from last year’s Q2). The company also said it expects full-year AFFO of $1.92 to $1.96 per share, which would be an improvement from 2018, when it earned $1.85 per share.
* Reflects annualized dividend growth since going public in November 2014.
- Market value: $10.6 billion
- Dividend yield: 5.2%
- 5-year average annual dividend growth: 13.3%*
VICI Properties (VICI (opens in new tab), $22.95) is a gaming-focused REIT that owns 22 properties – including Caesars Palace – that span 14,800 hotel rooms, and more than 150 restaurants, bars and nightclubs. In addition to Caesars, it also owns nine Harrah’s facilities across the country, race tracks and golf courses.
VICI Properties, which only went public in February 2018, has a limited dividend-growth history, but its prospects look attractive.
The casino gaming industry is perpetually growing. Gaming revenues improved 3.5% year-over-year in 2018 to a record high $41.7 billion, according to the American Gaming Association. In modern times, national commercial casino gaming revenues have fallen only once in annual terms – 2009, during the Great Recession – and then only mildly.
The company posted adjusted FFO of 38 cents per share in the second quarter, up from 35 cents in the year-ago period. Management projects full-year 2019 adjusted FFO of $1.45 to $1.47 per share, up modestly from $1.43 per share, in part because it has been issuing new shares. But management also notes it has financed acquisitions with equity instead of debt (indeed, the company believes an investment-grade debt rating is between 18 and 36 months away thanks to aggressive deleveraging). This flattens FFO-per-share growth in the short run, but arguably will boost profits in the long run.
VICI has increased its dividend in each of the two years since it hit public markets. In fact, CFO David Kieske said in the most recent earnings call that the company wants to “ultimately be a Dividend Aristocrat,” emphasizing consistent timing for future dividend increases. We’ll check in on that in another couple decades ... but the idea that VICI is committed to dividend growth is encouraging.
* Represents annualized dividend growth since going public in February 2018.
MGM Growth Properties
- Market value: $8.9 billion
- Dividend yield: 6.2%
- 5-year average annual dividend growth: 9.6%*
MGM Growth Properties (MGP (opens in new tab), $30.47), which was spun off of MGM Resorts International (MGM (opens in new tab)) in 2016, owns or otherwise controls 14 resorts in Las Vegas and across the U.S., as well as a large-scale dining-and-entertainment district on the Las Vegas Strip. Its assets include 27,400 hotel rooms, 150 retail outlets, 300 dining-drinking outlets, 20 entertainment venues, various convention facilities and even a couple of race tracks.
While the company boasts several well-known Las Vegas assets such as Mandalay Bay and Mirage, it is well-diversified geographically. In fact, in its second-quarter report, MGP management noted that less than half the REIT’s EBITDA (earnings before interest, taxes, depreciation and amortization) came from outside Las Vegas. That includes the MGM National Harbor near Washington, D.C., and Borgata in Atlantic City.
Much of MGP’s growth over the past few years has come courtesy of an aggressive acquisition strategy. But the company has organic growth built in, too, via 2% fixed rent escalators on about 90% of its rents. Those are good through 2022, when “revenue to rent” hurdles kick in.
In September, MGM Growth Properties increased its dividend for the ninth time since its IPO, and for the sixth consecutive quarter. It was a marginal increase of about half a percent, but the payout is 7.4% better than it was at this point last year. That’s supported by profit growth – its second-quarter AFFO climbed 7% year-over-year, and 2018’s AFFO was about 11% better than 2017’s.
* Reflects annualized dividend growth since going public in April 2016.
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