Interest rates have been elevated over the past few years as the Federal Reserve has tried to quash stubbornly high inflation. With inflation finally starting to moderate, the Federal Reserve has signaled that it will cut rates several times over the coming months.
Higher rates have had a particularly notable impact on real estate investment trusts (REITs). They need to borrow lots of money to fund acquisitions and property development.
Given their leverage to interest rates, REITS should benefit when they start falling. That makes them some of the smartest dividend stocks to buy right now for those with a little cash to put to work. Three great REIT options are Realty Income(NYSE: O), Mid-America Apartment Communities (NYSE: MAA), and Prologis(NYSE: PLD).
A steady grower with a catalyst
Shares of Realty Income currently sit more than 15% below their peak from three years ago when interest rates were lower. Because of that decline, its dividend yield is over 5% these days. That's several times higher than the sub-1.5% dividend yield of the S&P 500. At that rate, the REIT can turn a $500 investment into more than $25 of dividend income each year.
Falling rates should benefit Realty Income. It will make it cheaper for the REIT to borrow money to fund acquisitions and development projects. That could enable it to invest more money in growing its portfolio in the future.
The diversified REIT has a stellar record of growth. It has increased its dividend for 108 straight quarters and 127 times overall since it came public in 1994. With interest rates shifting from a headwind to a tailwind, the REIT should have no trouble continuing to expand its portfolio and payout in the future.
Its headwinds will soon fade
Shares of apartment REIT Mid-America Apartment Communities have lost nearly 30% of their value from a few years ago. That's partially because higher rates have weighed on the value of apartment buildings since it's more expensive to finance these properties. That slump has pushed its dividend yield up over 3.5%.
Another issue impacting Mid-America has been a surge in the supply of new apartments, driven by a post-pandemic building boom from when rates were much lower. Its markets are steadily absorbing that new supply as residents move into those brand-new apartments.
On a positive note, higher rates in recent years have caused a significant slowdown in new apartment construction. Because of that, the REIT expects deliveries to decline in the coming months. That catalyst should drive a reacceleration in rent growth.
Meanwhile, the REIT has started to go on the offensive by acquiring new communities and approving development projects. These investments should help further accelerate its growth in the coming years. Add in its high-yielding and steadily rising dividend, and this apartment REIT has strong total return potential.
Robust return potential
Shares of leading industrial REIT Prologis have plunged about 25% from their peak a few years ago. That decline has driven its dividend yield up to around 3%.
A big driver has been the impact of higher interest rates on its tenant base. It has caused some current and prospective tenants to delay making decisions on leases this year. This indecision caused the REIT to reduce its guidance for 2024.
However, the company sees this as only a temporary setback lasting a few quarters. In the long term, Prologis is optimistic that demand for warehouse space will continue to grow. That drives its belief that its funds from operations (FFO) will grow at an accelerated rate in the coming years.
On top of that, it intends to capitalize on new growth opportunities, like data centers and energy, to further accelerate its growth prospects. That should enable it to continue growing its dividend at a well-above-average rate. These factors also position the REIT to potentially produce superior total returns in the coming years.
A smart time to buy REITs
Interest rates are shifting from a major headwind to a significant tailwind for REITs. Falling rates will lower their borrowing costs while increasing the value of their real estate. That catalyst positions investors to earn strong returns from REITs in the coming years, making leaders like Realty Income, Mid-America Apartment Communities, and Prologis look like smart buys right now.
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Matt DiLallo has positions in Mid-America Apartment Communities, Prologis, and Realty Income. The Motley Fool has positions in and recommends Mid-America Apartment Communities, Prologis, and Realty Income. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
