The stock market has been on a major bull run over the past year, rallying more than 35%, and now stocks are getting more expensive. The S&P 500 currently trades at nearly 25 times earnings, up from about 20 times at this point last year.
While bargains are getting harder to find, there are still plenty of deals out there if you know where to look. For example, several real estate investment trusts (REITs) trade at bargain prices right now, including Realty Income(NYSE: O) and Rexford Industrial Realty(NYSE: REXR). They also offer high dividend yields, making them attractive income investments right now.
Healthy total return potential
Realty Income expects to generate between $4.15 and $4.21 of adjusted funds from operations (FFO) per share this year. With its stock price recently below $60 a share, the REIT trades at about 14.5 times earnings. That's significantly cheaper than the S&P 500, and it's why Realty Income has a much higher dividend yield, at more than 5% versus less than 1.5% for the S&P 500.
The diversified REIT, which has its hands in industrial, retail, gaming, and other properties, is growing at a solid rate. Its adjusted FFO rose 6% per share in the second quarter, driven by rent growth and acquisitions, including its $9.3 billion merger with fellow REIT Spirit Realty. That enabled the REIT to continue increasing its dividend, to the tune of 1.6% year over year in the second quarter.
Realty Income expects to continue growing. It believes it can grow its adjusted FFO per share by 4% to 5% per year, driven by rent growth and accretive acquisitions. That should enable the REIT to continue increasing its dividend, which it has done 127 times since coming public in 1994. Add its high-yielding payout, growth, and dirt cheap valuation together, and Realty Income looks like a great investment that could deliver double-digit annual total returns in the future.
Robust built-in growth drivers
Rexford Industrial expects to produce between $2.33 and $2.35 of core FFO per share this year. With its share price currently over $40, the REIT trades at less than 17.5 times its FFO. That's dirt cheap for a company with its growth profile. That low valuation is why the REIT currently yields nearly 4%.
The industrial REIT focused on the southern California market grew its core FFO by 13.1% in the third quarter, and by 5.4% per share after accounting for the dilution of stock sales to fund recent accretive acquisitions. The company benefited from strong rent growth, as comparable rental rates increased by 39.2% on new and renewal leases signed during the quarter, driven by robust demand for warehouse space in Southern California amid constrained supplies. It has also closed $1.4 billion of new investments year to date.
Rexford Industrial expects to continue growing briskly. The industrial REIT sees a combination of repositioning and redevelopment projects, as well as rent growth through contractual rate increases and the capture of higher market rates as legacy leases expire, and it recently announced new investments to boost its net operating income by 34% through the third quarter of 2027. That doesn't include the potential impact of future acquisitions. With a very conservative balance sheet, Rexford has ample financial flexibility to continue making accretive new investments.
The REIT's visible growth should allow it to continue boosting its dividend at a brisk rate. Rexford has delivered 18% compound annual dividend growth over the past five years, much faster than its peers, which are at 11% on average. The warehouse owner offers investors an attractive income stream and growth profile for a value price, making it look like a no-brainer buy right now.
Income and upside at great prices
Realty Income and Rexford Industrial currently trade at discounted valuations compared to the broader market, which is why they offer such high dividend yields. With more growth ahead, they look like screaming buys right now. They could produce a lot of income and stock price appreciation in the future.
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Matt DiLallo has positions in Realty Income and Rexford Industrial Realty. The Motley Fool has positions in and recommends Realty Income and Rexford Industrial Realty. The Motley Fool has a disclosure policy.
