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When investing in an IRA, growth potential is extremely important. After all, years of tax-deferred growth can make you an IRA millionaire, even though your contributions are capped at $5,500 per year. Therefore, ideal IRA stocks have long-term growth potential as well as strong dividend income that you can rely on after you retire. That's why REITs such as Welltower (HCN +1.24%) and AvalonBay Communities (AVB +0.91%) can make great additions to your IRA today.
Decades of demand growth ahead
I've written before about how strong of a long-term investment healthcare real estate will be over the next several decades, and Welltower is my favorite REIT with a healthcare focus. In fact, the stock is a cornerstone of my own retirement portfolio.
Welltower owns nearly 1,500 properties with a focus on senior housing, and has been growing at an impressive pace, averaging more than $4 billion in new investments in each of the past four years.
The reasons I love healthcare real estate, and senior housing particular, are simple -- demand growth and cost inflation. The 75-and-up population in the U.S. is growing seven times as fast as the overall population, and I actually think this will accelerate in the future as life expectancies grow and baby boomers continue to retire. In addition, national health expenditures are projected to grow at a 5.8% annual rate over the next decade, partially due to the increased healthcare needs of older individuals and also because healthcare costs in general have been rising faster than inflation.
Since commercial properties derive most of their value from their ability to generate income, this could push Welltower's rental income and property values steadily higher in the years ahead.
Finally, Welltower has a track record that any IRA investor would love to see in their own portfolio. Over its 45-year history, Welltower has increased its dividend at a 5.7% annualized rate and has averaged a 15.6% total return for investors during that time -- a remarkably long time period to sustain such high performance. To illustrate just how impressive this is, consider that a $10,000 investment in Welltower 45 years ago would be worth more than $6.8 million today and would be producing over $295,000 in annual dividend income.
Source: Welltower company presentation
A good time to be a landlord
The homeownership rate is at its lowest level in more than five decades. There are several possible reasons for this -- rising home prices, high student debt levels, and stagnant wage growth, to name a few. Combined with the trend toward urbanization in the United States, this means that demand for apartments -- especially those in cities -- should continue to rise for the foreseeable future.
AvalonBay Communities is an excellent way to invest in this trend. The company owns or holds an ownership interest in 282 apartment communities located in attractive coastal markets with high homeownership costs and limited new supply of apartments. Examples of AvalonBay's core markets include San Francisco, New York City, and Washington D.C. -- places with strong job and population growth, and high barriers to new apartment construction. The idea is simple: Growing demand and limited supply should result in strong rent growth going forward.
Development is the key driver of growth for AvalonBay, and results in higher profitability than could be expected if the company simply acquired existing properties. AvalonBay has $6.4 billion worth of development in the pipeline right now, including $2.7 billion of properties currently under construction, so this should be a big driver of profit growth over the coming years.
Source: AvalonBay investor presentation
Over the past 10 years, the company has produced an 11.7% annualized total return, and has grown its dividend at a rate of 5.8% per year. Core FFO growth has been even more impressive at 7.5%, so it's fair to say that the dividend growth was at a comfortable pace for the company.
What makes a good IRA stock?
In a nutshell, the best plan of action is to fill your IRA with stocks that have as much growth potential as possible with as little risk as possible.
The two stocks mentioned here are not without risk. Demand for private-pay senior housing could fall during a recession, and if home prices fall it could make homeownership more affordable and as a result AvalonBay's apartments could become less attractive. And, in a broader sense, rising interest rates could hurt REITs as a whole.
However, the point is that these REITs' growth potential and consistent income more than make up for the risks investors take to own them. While I encourage you to diversify your IRA -- by no means should you rely solely on a couple of REITs -- the risk-reward lessons I've discussed here can be applied to other stocks in order to help you construct a well-diversified portfolio that can produce exceptional income and growth with minimal downside risk for decades to come.
