To be clear, the goal of long-term investing isn't to get rich quickly, or to chase the "next big thing." Rather, the most certain way to create wealth is to buy a diverse portfolio of high-quality, dividend growth stocks, and hold them for long periods of time. Over the past several decades, one of the best types of stock to buy and hold has been real estate investment trusts (REITs).
Here are three examples that have turned $5,000 investments into $50,000 or more over the past 20 years, and should continue to produce market-beating returns. In fact, I'm so confident in these companies, I own some of them in my own portfolio.
The monthly dividend company
Realty Income (NYSE:O) is probably my overall favorite REIT, and is actually the second-largest stock holding in my own portfolio.
This REIT specializes in freestanding, single-tenant retail properties with specific types of tenants. Realty Income wants its revenue stream to be relatively immune to recessions as well as competition from online retailers, so most of its properties can be classified in one of three ways:
- Non-discretionary businesses (such as drugstores and grocery stores)
- Service-based businesses (movie theaters and fitness centers)
- Low-price-point retail (dollar stores and warehouse clubs)
To add to the stability, Realty Income's tenants sign net leases with 15-20 year initial terms, under which the rent increases annually and taxes, insurance, and maintenance are the responsibility of the tenant. The resulting stability can be seen in Realty Income's occupancy (which has never dropped below 96%) and its track record of dividend growth. In fact, Realty Income increases its dividend quarterly, and has done so for 74 consecutive quarters.
As of this writing, Realty Income pays a 3.8% annual yield in monthly installments, and has produced an impressive 17.8% average total return since its 1994 IPO. While this doesn't necessarily mean anything about the future, there's no reason to believe the excellent performance won't continue.
Low costs and a leading market share
Public Storage (NYSE:PSA) is one of the more interesting REITs in the market, and (full disclosure) the only REIT mentioned in this article that I don't own. The largest and most recognizable self-storage company in the market, Public Storage is larger than its next three competitors combined, with nearly 2,600 properties holding 187.7 million square feet of rentable space.
First of all, the self-storage business has some pretty attractive qualities. The facilities carry about half of the maintenance costs of other forms of real estate, and the cost of turning over a storage unit is much lower than turning over, say, a retail property. In fact, Public Storage's properties break even with just 30% occupancy.
Fortunately, the company is doing significantly better than that (occupancy is over 90%), and shareholders have reaped the rewards. Over the past 10 years, core FFO grew at an annualized rate of 9% per year, and the company raised its dividend by 12%. Public Storage is breaking its own tradition and just issued its first significant corporate debt offering in some time -- $264 million in 10-year notes at 2.175% interest -- taking advantage of low rates to boost returns. So there's reason to believe the company's performance could be even better in the future.
Healthcare real estate is on sale
I've written several times about a few different healthcare REITs lately, and for good reason -- they're cheap. Even the rock-solid sector giants like Welltower (NYSE:HCN) are trading for a significant discount to their REIT peers. To name one example, the retail REIT discussed in this article, Realty Income, trades for 21.9 times 2016's projected funds from operations (FFO), while Welltower trades for a multiple of just 15.7.
Welltower has about 1,500 properties in the U.S., U.K., and Canada. Its specialty is senior housing, which makes up 64% of the portfolio, but there are also substantial holdings in long-term and post-acute care properties, and outpatient medical facilities. While the healthcare real estate business is obviously too complex to explain in a few paragraphs, Welltower's main business model is simple – buy properties that are newer and nicer than the competition, located in the most desirable markets.
Not only is healthcare real estate cheap, but it has plenty of room to grow in the years ahead. The senior citizen population in the U.S. is expected to roughly double by 2050, which will create growing demand -- especially for the types of properties Welltower specializes in. And, the industry is highly fragmented. No REIT has more than 3% of the market, so there is also plenty of room to expand by acquiring existing properties.
I'd also like to mention HCP Inc. (NYSE:HCP) for investors who may be willing to take on a bit more risk. HCP has an outstanding history of growth and dividend raises, but its shares have struggled ever since it posted a surprise loss earlier this year. HCP recently announced plans to spin off its troubled assets and attempt to maximize shareholder value; if successful, this could be huge for investors who had the patience to buy pre-spinoff.
The long-term potential is huge
I mentioned that each of these REITs delivered tenfold returns or better over the past two decades, so here are the numbers. A $5,000 investment in Welltower 20 years ago would be worth about $68,500 today, assuming reinvestment of all dividends. Even more impressive, the same amount invested in Realty Income would have grown to $109,000. And, Public Storage was the big winner during that time period, with a $5,000 investment ballooning to more than $126,000.
The bottom line is that many people think of commercial real estate as a "boring" business, but its potential for wealth creation is anything but.
Matthew Frankel owns shares of HCP, Realty Income., and Welltower. The Motley Fool recommends Welltower. 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.