Real estate is one of society's oldest wealth-building tools. There's only so much property in the world, and people will always need it. But most investors don't have the deep pockets to invest in real estate in a big way.
That's where real estate investment trusts, or REITs, can help. They give investors the flexibility of buying and selling shares and the benefit that owning real estate brings: passive income.
Here are three fantastic REITs that investors should consider buying hand over fist in April.
Why REITs make great dividend stocks
REITs purchase and lease real estate. They don't pay corporate income tax as long as they pay at least 90% of their earnings to shareholders as dividends, which is why they make such good income stocks. Many REITs have dividend yields well above what you'll typically find from other companies.
As you'll see below, there are various types of real estate. REITs generally stick to what they're good at, so they usually concentrate on a specific type of real estate. Some examples include retail property, hospitals and healthcare facilities, apartment buildings, warehouses -- you name it.
You can build a diversified portfolio of REITs and own various property types. Here are three great examples:
1. A leader in logistics real estate
Prologis(NYSE: PLD) is a REIT that focuses on high-tech distribution centers. It leases out 1.2 billion square feet of real estate on four continents.
Many of its tenants are corporations in various industries, ranging from retailers to automotive companies. It's also one of the largest REITs with roughly a $120 billion market cap.
The company's dividend yield is just below 3% at today's share price. REITs pay their dividends from cash flow, referred to as funds from operations (FFO), which are like earnings to traditional corporations.
The dividend is very well funded. The dividend payout ratio is just 56% of FFO today, and management's latest payout increase of 10.3% should instill confidence in shareholders. Prologis has paid and raised its dividend for 10 consecutive years.
Analysts expect earnings to drop slightly this year but accelerate to double-digit percentage growth for several years after. The stock trades at 21 times its estimated 2024 FFO, which is a fair price if Prologis's FFO grows by 11% to 13% annually, as analysts anticipate.
2. A blue-chip retail REIT
NNN REIT(NYSE: NNN) specializes in single-tenant retail properties. Think fast-food restaurants, car washes, and gas stations.
The company owns more than 3,500 properties across the U.S. and generally signs 10-year leases, giving NNN dependable revenue. It does great in all economies because its tenants are recession-proof. People still need gasoline and grab a quick meal on the go during good and bad times.
The company has a long track record of dividend growth to support this. Management has paid and raised the dividend for 35 consecutive years. It's also has a tempting 5% yield at today's share price. The dividend is cushioned by a manageable 64% dividend payout ratio, based on FFO.
You own NNN REIT for its stable, high-yield dividend, not for its growth. Analysts believe its FFO will grow at a low-single-digit percentage pace over the long term, warranting a low valuation, which today is 13 times FFO. Consider this REIT if you want to earn low-stress passive income.
3. A self-storage superstar
Public Storage(NYSE: PSA) owns 3,300 self-storage centers across the U.S. Unlike many REITs, it also operates and manages the properties.
The cool thing about Public Storage is that it can easily adjust its customer pricing. It has more than 2 two million customers, and the average tenant stays seven to 10 months -- a good thing as long as turnover isn't too high.
The company isn't a traditional dividend growth stock. Management has paid a special dividend before and doesn't raise its quarterly dividend yearly, but that doesn't necessarily mean the dividend is in trouble. The payout ratio is a healthy 67% of FFO, and investors get a yield of more than 4% at the current share price.
Analysts forecast FFO growth in the low to mid single-digit percentages in the coming years. It's another REIT that won't blow your socks off with growth but it will provide steady income for your portfolio and peace of mind. The stock trades at a reasonable 17 times FFO today.
Should you invest $1,000 in Prologis right now?
Before you buy stock in Prologis, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Prologis wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 1, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
