Real estate investment trusts (REITs) buy a lot of properties, lease them out, and split the rental income with their investors. U.S. REITs are also required to pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate.
That simple business model usually makes REITs a sound investment for most income investors, but rising interest rates weighed down the sector for two reasons. First, higher rates made it more expensive to purchase new properties. Second, REITs lost their luster as income plays as the yields of risk-free CDs and T-bills soared above 5%.
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But with interest rates set to decline in the near future, shrewd investors should pivot back toward REITs before the yield-starved bulls rush back. I believe these four resilient REITs are worth buying right now: Realty Income(NYSE: O), Vici Properties (NYSE: VICI), STAG Industrial (NYSE: STAG), and Digital Realty Trust(NYSE: DLR).
1. Realty Income
Realty Income is one of the world's largest REITs. It owns 15,450 properties in the U.S., U.K., and Europe, and it leases them out to over 1,500 tenants across 90 industries. Its top tenants include recession-resistant retailers like Walmart, 7-Eleven, Walgreens, and Dollar Tree.
Some of its top tenants struggled with store closures in recent years, but it still maintained a high occupancy rate of more than 96% over the past three decades. It pays its dividends on a monthly basis, and it's raised its payout 126 times since its IPO in 1994. It currently pays an attractive forward yield of 5%, and its stock looks like a bargain at 16 times last year's adjusted funds from operations (AFFO) per share.
2. Vici Properties
Vici is a REIT that mainly owns casino and entertainment properties in the U.S. and Canada. Its top tenants, which it tightly locks into multidecade contracts, include Caesar's Entertainment, MGM Resorts, Penn Entertainment, and Century Casinos. It's also maintained an impressive occupancy rate of 100% ever since its IPO in 2018.
Vici reduced its dividend during the peak of the pandemic in 2020 and 2021, but it's raised its payout over the past two years. It pays a high forward yield of 4.9% on a quarterly basis, and its stock still looks cheap at 16 times its trailing AFFO.
3. STAG Industrial
STAG Industrial is an REIT that owns 573 industrial properties across 41 states. Its top tenants include Amazon, FedEx, and XPO, and it ended 2023 with a high occupancy rate of 98.2%. Many of its properties are used as e-commerce fulfillment centers, and that foundation could make it a less macro-sensitive play than brick-and-mortar retail or commercial REITs.
STAG pays monthly dividends, and it's consistently increased its payout every year since its IPO in 2011. It currently pays a forward dividend yield of 3.7% and trades at just 18 times last year's core FFO per share.
4. Digital Realty Trust
Digital Realty Trust is an REIT that leases data centers to over half of the Fortune 500 companies. Its top customers include tech giants like IBM, Oracle, and Meta Platforms. It operates more than 300 data centers in 50 metro areas across the world, and the secular expansion of the cloud and artificial intelligence (AI) markets should continue to drive its long-term growth.
Digital Realty's year-end occupancy rate slipped from 84.7% in 2022 to 81.7% in 2023 as high rates and other macro headwinds throttled the expansion of the cloud market. It trades at 23 times last year's core FFO per share, which makes it a bit pricer than the other REITs on this list, and it pays a lower forward dividend yield of 3.3% on a quarterly basis. It also didn't raise its dividend last year as its growth cooled off.
But despite those challenges, Digital Realty could still represent a good way to simultaneously profit from the REIT sector's recovery and the expansion of the data center market.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon, Meta Platforms, Realty Income, and Vici Properties. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, FedEx, Meta Platforms, Oracle, Realty Income, Stag Industrial, and Walmart. The Motley Fool recommends International Business Machines, Vici Properties, and XPO. The Motley Fool has a disclosure policy.
