Illustration by Benedetto Cristofani
With real estate recovering from the Great Recession, property-owning REITs have enjoyed healthy gains. Returns (including dividends) have averaged 10% over the past five years. Yet REITs, which own and manage real estate such as apartments, malls and offices, still look compelling.
The stocks trade at 92% of their underlying property values—below the long-term average of 100%, according to Bank of America Merrill Lynch. Yields average 4.0%, about double that of Standard & Poor’s 500-stock index. REITs should gradually boost their distributions as they increase rents and buy or develop additional properties.
Risks to your money. Many REITs borrow heavily to finance their business and could be hurt by higher rates. A downturn in real estate values would also likely hurt REIT shares. Some firms face specific industry pressures. Health care REITs, for instance, could be hurt by cutbacks in reimbursements by Medicare for patients in senior housing or nursing facilities.
How to invest. Schwab U.S. REIT (SCHH, $41, 3.7%), a member of the Kiplinger ETF 20, holds a basket of 106 REITs spanning the property spectrum. Annual fees of 0.07% undercut every other REIT ETF on the market.
Mall owner Simon Property Group (SPG, $172, 4.1%), the largest publicly traded U.S. REIT, has been hurt by concerns that online shopping is killing many retailing tenants. But Simon is focusing on more-profitable upscale malls that should benefit from closures of lower-quality shopping centers. Simon hiked its dividend by 9.4% in 2017 and should keep raising its payout as it adds more properties.
Hospitality Properties Trust (HPT, $32, 6.3%) leases space to hotel operators such as Hyatt and Marriott, collecting a cut of nightly room rates at more than 300 properties. Hotel revenues can bounce around with tourism and business-travel trends. But the firm also owns 198 travel centers—places where truckers stop to eat, rest and fuel up their rigs. Growth at Hospitality’s two businesses should enable the company to raise its dividend modestly in the years ahead.
For dividends every month, consider Realty Income (O, $60, 4.2%). It owns more than 4,900 properties, leasing space to retail giants such as Walgreens and Walmart. Most tenants pay for maintenance, taxes and insurance, leaving Realty to just collect rents. Its diverse array of tenants is less susceptible than mall owners to the growth of online shopping. The business is so steady that Realty has paid dividends for more than 560 consecutive months.