An ideal retirement investment should have three characteristics. It should offer a decent dividend yield. The dividend should be safe and reliable. And to protect against the ravages of inflation in your retirement years, the income stream should rise over time.
Surprisingly, most “income” investments fail at least one of these criteria. Bonds offer a safe yield, but in this rate environment it is not a particularly attractive one. And the payout certainly doesn’t rise over time. Mortgage REITs often pay out very attractive dividend yield, but the payout is rarely consistent, and mortgage REITs routinely cut their dividends when the yield curve flattens.
What about dividend-paying stocks? There are plenty of dividend-paying stocks that meet our criteria — and Macro Trend Investor’s Core Dividend Portfolio is chock full of them — but as a general rule, the higher and more enticing the dividend yield, the highly the likelihood that the dividend will be cut.
For the best combination of high dividend yield, safety, and inflation-beating dividend growth, your best bet is the equity REIT sector. And today, I’m going to give you five of my favorite retirement REITs.
Dividend REITs — Realty Income (O)
Dividend yield: 5.2%
I’ll start with a REIT that is so perfectly tailor-made for a retirement portfolio, I consider it irresponsible not to own it: Realty Income (O). Realty income is a “triple-net” retail REIT, meaning that its tenants are responsible for paying all taxes, insurance and maintenance. Realty Income only responsibility is to collect the rent — and to acquire new properties, of course.
Realty Income is known as the Monthly Dividend Company, and for good reason. It has paid 524 uninterrupted monthly dividends and has raised its dividend 75 times since 1994.
There is nothing to dislike about Realty Income as a retirement REIT. At current prices, it yields an attractive 5.2%. And its track record has proven it to be a reliable payer with a long history of keeping pace with inflation. The fact that the REIT pays its dividend monthly rather than quarterly is a nice bonus as well, as most of our living expenses in retirement will come on a monthly schedule.
Dividend REITs — National Retail Properties (NNN)
Dividend yield: 4.7%
Next on the list of retirement REITs is a close competitor of Realty Income, National Retail Properties (NNN). Like Realty Income, National Retail is a triple-net retail REIT, hence its ticker symbol. “NNN” represents “triple net.”
Also like Realty Income, NNN has been a serial dividend raiser over the years. The REIT has raised its dividend for 24 consecutive years and counting. NNN sports a current dividend yield of 4.7%, and its payout is plenty safe.
National Retail Properties and Realty Income invest in the same basic types of properties. Your local Walgreen (WAG) pharmacy is a perfect example: a free-standing building in a high-traffic area rented under a long-term lease by a high-quality tenant. These are properties that you can safely bet your retirement on.
Retirement REITs — Public Storage (PSA)
Dividend yield: 3.3%
No list of quality retirement REITs would be complete without Public Storage (PSA), the world’s largest landlord of self-storage units. Since building its first self-storage facility in 1972, Public storage has grown into an empire of more than 2,200 locations in the United States and Europe, totaling more than 142 million net rentable square feet. And its PS Business Parks interest adds another 28 million rentable square feet of commercial and industrial space.
Storage lockers have been a big business in recent years, and the housing bust was certainly a contributor. Americans who lost their homes or were forced to downsize had to put their belongings somewhere. But even as the housing market recovers, demand should remain high for storage lockers due to demographic factors.
Baby Boomers are starting the process of downsizing, selling their large suburban homes now that their children have left the nest. As they settle in to smaller digs, they will need to find a place to store their belongings. Public Storage will be the first number they call.
Public Storage pays a safe and respectable yield of 3.3%. It has also been a monster dividend raiser. Public Storage has raised its quarterly dividend from 22 cents per share in 2000 to $1.40 today. And the rate of increases is accelerating; the REIT has more than doubled its dividend since 2010.
Dividend REITs — Healthcare Trust of America (HTA)
Dividend yield: 5%
Another retirement REIT benefitting from favorable demographic trends is Healthcare Trust of America (HTA), one of the largest medical office landlords in America.
As Americans age, they will require more healthcare services. That part is a no-brainer. The problem, though, is getting paid. With the U.S. government strapped for cash, Medicare reimbursements are a lot less generous than they used to be across most of the medical field. And in the age of Obamacare’s micromanagement, many doctors may see significant cuts to their income.
But while the economics of medicine may not be as attractive as they once were, doctors are still reliable rent payers. This makes HTA a safe bet. And with a current dividend yield of 5%, HTA is an attractive one as well. HTA is a young REIT, having only gone public in 2012. So it’s too early to sing its praises as a dividend raiser. But given the favorable economics of the business, I would expect the dividend hikes to follow shortly.
Dividend REITs — Retail Opportunity Investments (ROIC)
Dividend yield: 4.1%
The last retirement REIT on the list is another young REIT, Retail Opportunity Investments (ROIC). ROIC has a simple enough business model: The company buys neighborhood shopping centers, generally anchored by a “necessity-based” retailer such as a major grocery store. The REIT currently owns and operates fifty-one shopping centers encompassing approximately 5.5 million square feet.
There is a lot to be said for buying small, relatively new REITs. Unlike some of their larger peers, which overextended themselves during the bubble years of the mid 2000s, younger REITs have a fresh balance sheet. They have no “legacy” properties that are carried at unrealistic values, and they have comparatively low levels of debt.
ROIC has raised its dividend 8 times since going public in 2010, and it sports an attractive 4.1% dividend yield. Given the conservative nature of its real estate portfolio, I would consider ROIC a solid contender for a retirement REIT portfolio.
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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long O, NNN, HTA, ROIC. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.