Real estate investment trusts (REITs) are entities that acquire numerous properties, lease them, and distribute the rental income among their investors. In the United States, REITs are obligated to disburse at least 90% of their taxable income as dividends in order to benefit from a favorable tax rate.
This straightforward business model typically renders REITs a reliable investment for income-seeking investors. However, the sector has recently faced challenges due to rising interest rates for two key reasons. Firstly, the increased rates have made acquiring new properties more costly. Secondly, as the yields of risk-free certificates of deposit (CDs) and Treasury bills (T-bills) surged above 5%, REITs became less appealing as income-generating investments.
With interest rates anticipated to decrease soon, astute investors should consider shifting their focus back to REITs before yield-seeking investors return en masse. I believe these four robust REITs are worth considering at present: Realty Income (0.11%), Vici Properties (-0.36%), STAG Industrial (-1.95%), and Digital Realty Trust (-1.13%).
1. Realty Income
Realty Income ranks among the world’s largest REITs, owning 15,450 properties across the U.S., U.K., and Europe. It leases these properties to over 1,500 tenants spanning 90 industries, including recession-resistant retailers like Walmart, 7-Eleven, Walgreens, and Dollar Tree.
Despite some top tenants experiencing store closures in recent years, Realty Income has maintained a high occupancy rate of over 96% for the past three decades. It disburses dividends monthly and has increased its payout 126 times since its initial public offering (IPO) in 1994. Currently, it offers an attractive forward yield of 5%, with its stock appearing undervalued at 16 times the previous year’s adjusted funds from operations (AFFO) per share.
2. Vici Properties
Vici Properties primarily owns casino and entertainment venues in the U.S. and Canada. Its major tenants, secured under long-term contracts, include Caesar’s Entertainment, MGM Resorts, Penn Entertainment, and Century Casinos. Impressively, Vici has maintained a 100% occupancy rate since its IPO in 2018.
Although Vici reduced its dividend during the height of the pandemic in 2020 and 2021, it has increased its payout over the past two years. It provides a high forward yield of 4.9% quarterly, with its stock remaining affordable at 16 times its trailing AFFO.
3. STAG Industrial
STAG Industrial owns 573 industrial properties across 41 states. Key tenants such as Amazon, FedEx, and XPO contribute to its high occupancy rate of 98.2% at the end of 2023. Many properties serve as e-commerce fulfillment centers, potentially rendering STAG less sensitive to broader economic fluctuations compared to traditional retail or commercial REITs.
STAG distributes monthly dividends and has consistently increased its payout every year since its IPO in 2011. Currently, it offers a forward dividend yield of 3.7% and trades at 18 times the previous year’s core FFO per share.
4. Digital Realty Trust
Digital Realty Trust leases data centers to over half of the Fortune 500 companies, with notable clients like IBM, Oracle, and Meta Platforms. It operates more than 300 data centers in 50 metropolitan areas worldwide. The continued growth of the cloud and artificial intelligence (AI) sectors is expected to fuel its long-term expansion.
Digital Realty’s year-end occupancy rate decreased from 84.7% in 2022 to 81.7% in 2023 due to high rates and other macroeconomic challenges impacting cloud market growth. It trades at 23 times the prior year’s core FFO per share, making it slightly more expensive than other REITs listed here, and offers a lower forward dividend yield of 3.3% quarterly. The company did not increase its dividend last year due to slowed growth.
Despite these hurdles, Digital Realty could still be a strategic choice for profiting from both the REIT sector’s revival and the data center market’s growth.
