The end of the year is a time for investors to focus on diversification. Despite the major exchanges continuing to hit record highs, there are reasons for investors to be uneasy.
The market continues to digest the impacts (real and perceived) of the U.S.-China trade war. Earnings reports, though basically strong, suggest some weakness may exist. Institutional investors are spurning the usually fast-growing “unicorn” stocks. And 2020 is an election year which introduces uncertainty into the market.
With uncertainty comes volatility. If you’re looking for investment strategies to diversify your portfolio, now may be a time to look at real estate investment trusts (REITs).
REITs own, operate or finance income-generating real estate properties such as apartment complexes or retail locations. REITs are heavily regulated and must meet a number of qualifications. They are legally required to pay at least 90% of their taxable income in dividends.
REITs are often specialized in specific areas such as residential or commercial. But even within those two areas there are distinctions. For example some REITs focus on healthcare facilities, others focus on apartments, and others may focus on shopping centers.
Here are three REITs that set up well for whatever hits the market in 2020.
Sun Communities (SUI)
Dividend yield: 1.89%
The first REIT I want to discuss is Sun Communities (NYSE:SUI). Manufactured homes are showing the highest percentage growth of all REIT sub sectors in 2019. Sun Communities is one of the leading REITs in this sector and focuses on the midwestern and southeastern United States.
With a market cap of $14.96 billion, Sun Communities is a large REIT that has been on a steady rise since the depths of the global economic crisis and the housing crisis. With that said, the stock has been getting a lift recently from a strong housing market. SUI stock is up over 55% in 2019.
On Nov. 19, the Commerce Department released information on the housing market that showed that it is getting ready to heat up even though the calendar says it’s winter.
Residential construction surged in October with permits at their highest level since May 2007. Housing stats were also up in October. Although slightly lower than estimates, the 1.314 million number is an 8.5% year-over-year increase.
SUI should continue to have a catalyst going forward as many rental properties are still citing very low vacancy rates.
Welltower (WELL)
Dividend yield: 4.18%
The next REIT for you to consider is Welltower (NYSE:WELL). This is the largest healthcare REIT. Its properties span a variety of categories across the spectrum of patient care. WELL owns over 1,517 properties including hospitals, outpatient clinics, assisted living, and skilled nursing facilities across the U.S., Canada, and the United Kingdom.
Healthcare will continue to be a hot sector with a number of catalysts. To begin with, the baby boomer generation is aging, and approximately 63% of WELL’s net operating income comes from senior housing. This is the core of the company’s portfolio.
And despite the rhetoric about a single payer system and “Medicare for all,” approximately 94% of Welltower’s revenues are private payers, so the stock is not exposed to that risk.
Welltower’s stock is up over 26% in 2019. In the second quarter, the company generated $1.3 billion in revenue with earnings coming in at $137.7 million.
It’s fair to be concerned about a dividend that has not grown in three years. But while it may not be best in class, it’s certainly not the worst. And with the stability you get from the recession-proof property mix, it’s a stock that’s worthy of consideration.
Equinix (EQIX)
Dividend yield: 1.76%
Equinix (NASDAQ:EQIX) is a REIT with exposure to the growing data center segment. EQIX owns over 200 data centers. Their global customer base includes nearly half of the Fortune 500 companies.
EQIX stock is up nearly 59% in 2019 compared to the S&P 500, which has returned 26.8%. But EQIX stock is not a one-year wonder. Over the last 10 years, Equinix stock has grown 640%, which crushes the 245% return in the broader market.
Institutional investors are forecasting the company’s earnings per share (EPS) to grow at a 21.4% average annual rate for the next five years. If that pans out, and there’s no reason to believe it won’t, the company will continue to have solid growth in its funds from operation (FFO). A larger FFO will allow EQIX to increase its dividend. EQIX shares currently have a dividend yield of 1.76%.
A catalyst for the data center segment is the organic growth that comes from recurring revenues. In the case of Equinix, recurring revenue accounts for approximately 94% of total revenues.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.
