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Social Security benefits are certainly nice to have, but they aren't intended to be any retiree's only source of income. To supplement your Social Security income, real estate investment trusts, or REITs, can give you the steady stream of income you need as well as enough growth to ensure your income keeps pace with inflation.
With that in mind, here's why retirees should consider National Retail Properties (NYSE: NNN) and Ventas (NYSE: VTR) for their stock portfolios.
Data source: YCharts. *As of 12 PM EST on 08/11/2016.
Retail is considered to be a risky sector by many investors, thanks to several high-profile retail bankruptcies over the past few years. However, there are some forms of retail that are resistant to recessions and competition, and a great way to play this kind of retail is National Retail Properties, a pure-play, freestanding retail REIT with nearly 2,300 properties.
The majority of National Retail Properties' tenants fit into one or more of three types of retail. Here's a brief description of each, with examples from the company's largest tenants.
- Service-based businesses:Businesses people have to physically go to, such as gas stations, restaurants, and fitness centers, are immune from online competition. (Examples: Sunoco, Mister Car Wash, LA Fitness, Taco Bell.)
- Non-discretionary businesses:Businesses like convenience stores sell products people need. (Examples: 7-Eleven, Pantry.)
- Low-price-point businesses:Warehouse clubs and other discount retailers actually tend to do better in poor economies. (Example: BJ's Wholesale.)
Tenants sign leases with 15-20-year initial terms, and the tenants are responsible for property taxes, building insurance, and maintenance costs. And, the leases typically have annual rent increases built in, leading to low portfolio turnover and a predictably rising income stream.
National Retail maintains a conservative balance sheet, with just over 32% of total capitalization made up of debt, and it has an investment-grade credit rating that allows it the financial flexibility to pursue growth opportunities as they arise. In fact, the company's current $650 million credit line has no outstanding balance at all.
This business model produces some pretty impressive results. National Retail's occupancy stands at 99.1%, and the company has been able to increase its dividend for 26 consecutive years. Even more impressive, the stock has produced 15.8% average annual total returns over the past 25 years. This combination of growth and rising income could be an excellent addition to your Social Security benefits.
Strong demand for senior housing
Ventas is a REIT specializing in healthcare real estate, with an emphasis on senior housing properties, as well as substantial holdings in medical office buildings, specialty hospitals, and skilled nursing/acute care properties. The business model is simple enough: Acquire attractive healthcare properties in great locations, and partner with some of the best operators in the business.
The main reason I love healthcare REITs as long-term investments is the favorable demographic and economic trends that should translate into lots of demand going forward. The 75-and-older age group is growing seven times as fast as the overall population, and overall U.S. healthcare spending, nearly three-quarters of which comes from people age 50 or older, is expected to grow at a 5.8% compound annual growth rate over the next decade.
Image source: Ventas investor presentation.
Ventas' performance speaks for itself. Over the past 20 years, the company has delivered 13.9% annualized total returns for investors.
For income-seekers, the results are just as impressive. Since 2001, Ventas has generated 11% average FFO/share growth, which has allowed the company to comfortably increase its dividend at a 10% annualized rate. And, with the favorable industry trends I mentioned earlier, there's no reason to believe Ventas' dividend (currently a 3.9% yield) can't continue to grow at an impressive, inflation-beating rate.
Just a starting point
Now, these are just two of many REITs that could make excellent additions to seniors' portfolios. And, it's also important to mention that these stocks should be used as just one piece of a well-diversified portfolio with exposure to several different sectors.
That said, the reasons I discussed for liking each of these stocks can be applied to others. The bottom line is that income is great, but growing income that's combined with the potential for principal growth should be every retired investor's ultimate goal, and these two REITs are good examples of how to achieve it.
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Matthew Frankel owns shares of National Retail Properties. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.