Since their creation in 1960, real estate investment trusts (REITs) have served as a stock-based property investment delivering both growth and income to investors. They encompass virtually all types of property. Most investors think office, industrial, or retail property when thinking of REITs. However, several other sectors of REITs exist, including REITs exclusively focused on real estate debt. Moreover, with the advances in technology, some REITs to buy have evolved to include space on telecom towers and building specifically designed for IT functions.
One primary attraction to REITs is the dividend payments. REITs pay at least 90% of their net income in dividends. In exchange, they receive an exemption from taxation on certain types of income. As a result, they pay an average dividend yield of 4.3%, more than twice as high as the S&P 500 dividend yield of about 1.8%.
Given the changes in the economy, some REIT sectors will outperform others. In recent years, the REITs to buy have involved advancing technology, and changing consumer trends and demographics. Telecom, data center, industrial, and healthcare REITs benefit from such changes. The following four REITs in these four different sectors will likely further their growth due to these changes:
Telecom – American Tower (AMT)
Investors looking for REITs to buy should consider American Tower (NYSE:AMT), which finds itself at the center of the 5G boom. AMT is the largest tower owner in the world, owning more towers than Crown Castle (NYSE:CCI) and SBA (NYSE:SBA) combined. Its locations play a critical role in the present and the future of wireless technology.
5G requires exponentially more cells than the previous technology. Even though many of the cells will end up on light poles or buildings, American’s towers still play a backhaul and a coverage role. This means high growth — despite their clients being limited to telcos such as AT&T (NYSE:T), Verizon (NYSE:VZ), T-Mobile (NASDAQ:TMUS). The telcos need the 5G upgrade to remain in business. Thus, all will pursue this expansion regardless of how the economy performs.
When calculated against funds from operations (FFO), the stock trades at a forward price-to-earnings (PE) ratio of 21. For this stock, this stands as a below-average valuation given the previous history. Moreover, its $3.08 per share annual dividend only comes out to about a 2.2% yield.
Still, what it lacks in dividend yield has been made up for in stock performance. Since hitting a 2009 low below $20 per share, the stock has moved steadily higher over the last nine years. It now trades in the low $140s per share range. This represents more than a sevenfold increase. With its client base needing more vertical real estate for 5G and its numerous applications, AMT stock should continue its steady march higher for years to come.
Data Center – Digital Realty Trust (DLR)
Digital Realty (NYSE:DLR) has become the leading REIT in the relatively new sector of data center REITs. They own buildings specially designed to hold IT equipment. They differ from standard industrial or office spaces in that they provide uninterrupted power supplies, air-cooled chillers, and high levels of physical security. In a data center-focused IT world, such centers provide a critical component in cloud computing.
The growth of the cloud has made DLR stock one of the lucrative REITs to buy. Gartner estimates cloud computing will rise to $186.4 billion in 2018. This represents a 21.4% increase from 2017’s figure of $153.5 billion. Moreover, the fastest-growing segment in the cloud is cloud infrastructure, projected to grow 35.9% to $40.8 billion. Such growth cannot occur without properties like the ones leased by Digital Realty.
This need has allowed the REIT to increase DLR stock dividends annually since the company began paying dividends in 2004. Today, its annual dividend of $4.04 per share gives the stock a dividend yield of about 3.5%. Despite this growth, it has a forward PE of about 17.5 against FFO earnings.
The company has also enjoyed a 13% compound annual growth rate (CAGR) since 2005. This makes Digital Realty the seventh largest publicly-traded REIT in the U.S. Given the growth rate that analysts expect cloud computing to enjoy over the next few years, stockholders who invest in cloud infrastructure should continue earning gains for years to come.
Industrial – Stag Industrial (STAG)
STAG Industrial (NYSE:STAG) owns and operates mostly single-tenant industrial properties. The REIT holds 360 buildings across 37 U.S. states. These properties serve as warehouses, distribution, and light manufacturing centers. However, warehousing and distribution have become the focal points recently. The growth of e-commerce has fueled the move out of retail properties and into industrial properties.
Because Amazon.com (NASDAQ:AMZN) and other e-retailers cannot find enough space, industrial property rents at a premium. This directly benefits the bottom line of STAG. The REIT is working to fill the high demand as it acquired 53 new buildings in 2017 alone.
As a result, average annual revenue growth stands at over 29% per year over the last five years. This will likely benefit shareholders on the dividend front. The current dividend holds at an annual level of $1.42 per share, a yield of about 5.3%.
However, with $1.78 per share in FFO income expected for this year, that could soon move higher. That level of income would also give STAG stock a forward PE of about 15. Income growth for the next two years should average just under 7%. However, STAG stockholders will enjoy a hefty dividend and a low valuation. Given these factors in a sector seeing rapid growth, STAG stock should remain one of the REITs to buy for the foreseeable future.
Healthcare – Ventas (VTR)
Ventas (NYSE:VTR) specializes in healthcare-related real estate. The company owns almost 1,200 properties designed for senior housing, medical office, hospital, skilled nursing and other types of medical-related purposes.
Demographics alone make VTR stock one of the REITs to buy. About 10,000 baby boomers per day are becoming Medicare-eligible. This trend alone should drive the demand for medical property higher. Since baby boom births peaked in 1957, the peak for Medicare age-ins should presumably occur in 2022. By 2029, all the eligible baby boomers will have aged into Medicare. Until this generation dies off in large numbers, the medical REIT sector should remain strong.
The current annual dividend has reached the $3.16 per share level, giving VTR stock a yield of about 5.5%. Also, this dividend generally sees yearly increases. Wall Street predicts FFO income of $4.04 per share this year. Moreover, if VTR stock actually earns $4.04 per share, VTR stock would have to pay $3.64 per share to meet REIT dividend requirements. Furthermore, the stock also trades at a forward multiple of around 14.4. Considering the growing population Ventas will serve, VTR stock trades at a reasonable valuation.
Analysts expect to see income growth in the mid-single-digits. Still, with a high dividend yield and a low multiple, investors should earn solid returns in Ventas at least until Medicare age-ins peak.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.