The real estate sector is an excellent place to look for stocks with above-average dividends that also have strong long-term growth potential. That's especially true for equity real estate investment trusts (REITs). Now may be a good time to consider adding an equity REIT or two to your portfolio, as many have been beaten down recently as a result of rising interest rates.
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With that in mind, here are five of the top equity REITs, all of which pay dividend yields of 4% or more and trade for attractive valuations.
Share prices and dividend yields are current as of 5/4/17. P/FFO, or price-to-funds from operations, is based on the midpoint of each company's 2017 guidance, except for Apple Hospitality REIT, which is based on trailing-12-month actual FFO, since forward guidance is unavailable as of this writing.
5 top real estate dividend stocks
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1. Realty Income
Realty Incomespecializes in freestanding net-lease retail properties and has more than 4,900 properties leased to 250 commercial tenants, most of which are engaged in competition-resistant or recession-resistant businesses. For example, service-based retail businesses such as movie theaters and fitness centers are virtually immune to e-commerce competition. And non-discretionary and discount-oriented businesses such as drugstores and warehouse clubs tend to do well no matter what the economy is doing.
Realty Income's net lease structure also adds an element of stability. Tenants sign long-term leases of 15 years or more and are responsible for variable expenses such as property taxes, building insurance, and maintenance. Because of this safety, Realty Income tends to trade at a justified premium to other types of REITs.
Realty Income has increased its dividend for 78 consecutive quarters, at an annualized growth rate of 4.7%. What's more, the company has delivered average total returns of 16.9% per year since its NYSE listing 23 years ago.
2. Simon Property Group
Mall REIT Simon Property Groupis the largest REIT of any kind, and you may know the company's branded mall properties that go by the names Premium Outlets and The Mills.
While many mall-based retailers are struggling these days, Simon has a few competitive advantages that keep its properties full of customers.
For starters, the company is willing to invest heavily to make sure its properties provide the best shopping experience available. Simon has completed redevelopment projects on roughly half of its properties, and its malls have features that 21st-century shoppers love, such as free Wi-Fi and more dining and entertainment options than other malls.
In addition, Simon treats its tenants as partners and actively invests in their success. One recent example is the innovative gift-card program Simon rolled out during the 2016 holiday season, which gives shoppers 5% back on any purchases in its malls. In a nutshell, Simon goes the extra mile to ensure that if retailers are forced to close underperforming locations, the locations within Simon's properties won't be on the chopping block.
3. Iron Mountain
Iron Mountainspecializes in records and data storage and serves more than 220,000 customers, including 94% of the Fortune 1000, in over 1,400 facilities worldwide.
Storage facilities are an inherently low-maintenance type of real estate. Turnover costs are low, and they don't cost much to maintain. In fact, Iron Mountain's properties operate at a gross profit margin of about 75%.
Furthermore, the company doesn't have to deal with the same turnover risk as other types of storage REITs, such as self-storage facilities. Whereas self-storage properties generally lease their space on a month-to-month basis, Iron Mountain's average lease has a three-year term, and the average item stored in one of the company's properties has been there for 15 years.
Leading healthcare REIT Welltower owns just over 1,414 properties, about 70% of which are senior housing facilities, some of which are leased to tenants and some of which are operated as partnerships. The company also owns long-term/post-acute-care properties and outpatient medical facilities. Ninety-three percent of Welltower's portfolio is composed of private-pay healthcare assets, which are more stable and predictable than those dependent on government reimbursements.
Welltower has an impressive 45-plus-year track record of delivering market-beating performance and strong dividend growth, and there's no reason to believe this situation will change anytime soon. The population in Welltower's target markets of the U.S., U.K., and Canada is aging rapidly, which should create steady growth in demand for healthcare properties over the coming decades, and senior housing in particular.
5. Apple Hospitality REIT
Apple Hospitality REITis a hotel REIT that invests in properties under various Hilton and Marriott brand names. As of this writing, the company owns 235 hotels with about 30,000 guestrooms, under such brands as Courtyard by Marriott, Residence Inn, Springhill Suites, Homewood Suites, Hilton Garden Inn, and Hampton.
The company's business model is to build a geographically diverse hotel portfolio made up of strong brands, partner with excellent operators, and constantly reinvest in the business to maintain an advantage over its peers.
To be clear, hotels aren't a defensive property type. In fact, they are probably the most recession-prone property type on this list. In good times, hotels have the power to adjust their rates up and down to maximize revenue, but in bad times, vacancy can be a serious problem, since hotels don't lease their space like most REITs do. This added element of risk is why the stock trades at a considerably lower valuation than the other REITs on this list.
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Matthew Frankel owns shares of Iron Mountain, Realty Income, and Welltower. The Motley Fool owns shares of and recommends Marriott International. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.