Want to know a little secret? When it comes to certain high-yielding sectors, many investors are putting too much stock in the theory that rising interest rates will kill their returns and result in losses. Case in point — real estate investment trusts (REITs).
Designed to allow regular retail investors to invest in commercial properties, REITs are required to pay out the vast bulk of their cash flows as dividends. That payout requirement produces yields in the 4% to 7% range for the majority of the sector. But the specter of rising interest rates has many investors spooked about REITs’ potential total returns in the upcoming few years.
Well, don’t fret. REITs and your portfolio will be just fine.
While REITs do feel rising interest rates immediately, this knee-jerk reaction from market participants fades and performance rebounds sharply. Looking at the 21 periods of time since 1980 when interest rates rose by at least 50 basis points, the FTSE NAREIT All Equity REIT Index managed to return an average of 16% over the next 12 months. That total return managed to crush the Barclays U.S. Aggregate Bond index.
So if you’re still looking for income or want a great total return, REITs should still make up a percentage of your portfolio. Here’s three top notch REITs to buy today and let Yellen & Crew be damned.
Great REITs To Buy #1: Realty Income Corporation (O)
That’s how many times REIT Realty Income Corp (O) has consecutively paid its monthly dividend 533 times. We’re talking about more than 40 years of consecutive monthly dividends — and what investor doesn’t want that?
Fueling that consistent (and steadily rising) monthly payout is its massive portfolio of freestanding real estate. Realty Income owns and operates more than 4,200 properties across 49 states and Puerto Rico. These freestanding properties include everything from convenience stores, restaurants, movie theaters, and automotive parts & services centers.
And Realty Income continues to grow. It recently announced a new $1.5 credit facility to add new properties to its ever-expanding umbrella.
What’s more, the vast majority of these properties are triple-net leased. That means that the tenants — not Realty Income — are responsible for the taxes, maintenance and insurance on the property. REITs love triple-net leases because they provide extremely juicy margins. And O stock is no different on that front.
Those rich margins have translated into strong funds from operation (FFO) and have made O stock a dividend machine since becoming a REIT in 1994.
For investors, O stock and its strong growing 4.8% yield make it one of the best REITs to buy today.
Great REITs To Buy #2: SL Green Realty Corp. (SLG)
As the saying goes, “If you can make it in New York, You can make it anywhere.” New York-based REIT SL Green Realty Corp. (SLG) is proof.
SLG owns some of the priciest digs in Manhattan as well as Brooklyn, Westchester, and neighboring Connecticut & New Jersey. All in all, SLG’s 75 office and retail properties are some of the most irreplaceable buildings in the entire city. As such, the REIT is able to charge some pretty hefty rents for its properties while still enjoying high occupancy rates.
And SLG continues to expand its property portfolio: The REIT recently inked a deal to buy 23 apartment buildings in trendy and attractive New York City submarkets — Gramercy Park, the West Village, and Chelsea — for $40 million. At the same time, two new joint ventures will expand its Class A office space within the city.
The focus on premier New York City real estate has served SLG nicely on the earnings and FFO front as well. As for investors, the REIT’s yield is a tad bit low at 2%. However, SLG has posted a total return of 160% over the past 10 years.
Great REITs To Buy #3: Health Care REIT, Inc.
One of the biggest mega-trends facing North America is our aging population. And Health Care REIT, Inc. (HCN) is poised to combat that problem head on, while making investors some serious coin.
As America’s population continues to live longer, they will require more medical services. More medical service equals more medical real estate. There’s a whole subsector of REITs dedicated to medical real estate. And HCN is the largest.
Health Care REIT owns more than 1260 of these assisted living facilities, hospitals and doctor’s offices across the country as well as properties in Canada and the U.K. What’s critical about HCN’s portfolio is that 87% of its revenue is driven by private pay sources and not the U.S. government — meaning HCN isn’t tied to regulation.
Its large triple-net portfolio of senior housing facilities doesn’t hurt, either.
Over the last decade, Health Care REIT has managed to grow its FFO by nearly 4% per year, while increasing its book value of properties by 5.5% in that time. Shareholders have been treated 174 consecutive dividend payments that have risen an average 2.9% per year over the last decade.
All of these factors combine to help HCN produce 14% annual total returns since its founding in 1970. If you were worried about interest rates, that growth rate should make you smile.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.