The best way to take advantage of your IRA's tax-deferred compounding power is to fill it with high-quality dividend-growth stocks. And one of the best places to find high-dividend stocks with potential to grow is the real estate sector. With that in mind, here are three rock-solid REITs that could produce excellent returns in your IRA for decades to come.
Image source: Getty Images.
The growth in data storage is just getting started
Data center REIT Digital Realty (DLR +0.38%) has produced total returns averaging 22.9% annually since its 2004 IPO -- a staggeringly high level of performance. This can be attributed to excellent management and strong industry growth over the past decade. However, I think the growth in the need for data storage is still in the early stages.
In a nutshell, Digital Realty owns, acquires, and operates data center properties, which it leases to tenants that read like a who's who of major tech and financial companies, such as IBM, AT&T, Facebook, JPMorgan Chase, and many more. Most of the current portfolio of 144 properties is in the U.S., but the company has begun to actively diversify its holdings across the globe.
Here's why I say there could be more rapid growth ahead. Through 2019, data center IP traffic and cloud IP traffic are projected to roughly double, and mobile data traffic is expected to grow even faster, according to projections from Cisco.
Image source: Digital Realty Trust. Projections are from Cisco.
Furthermore, data center demand is outpacing supply growth in key markets. For example, Northern Virginia's data center occupancy is at 96% even though inventory has grown by 17% in 2016 alone. Digital Realty's new properties in Dallas and Chicago are already 100% leased. Many of the company's properties have additional developable land, so there is a growth mechanism built right into the existing portfolio, which Digital Realty can take advantage of.
As far as dividends go, Digital Realty currently yields 3.7% and has increased its payout at a 12% annualized rate over the past decade, a streak that doesn't appear to be in jeopardy anytime soon.
Demand for healthcare real estate could double
Another rapidly growing area of real estate is healthcare, although the growth may be slower and longer-tailed than the growth in data centers. Specifically, the 65-and-older population in the U.S. is expected to double by 2050, and faster growth is expected in even higher age brackets. For example, the 75-and-older age group is growing seven times as fast as the overall population, and this group spends five times as much on healthcare than the average.
In addition, the real estate market is highly fragmented and in the early stages of being consolidated into REITs. No REIT has more than a 3% market share, and less than 15% of all healthcare real estate is REIT-owned. When you compare this with the figure for malls, 40%-50%, and that of hotels, 50%-55%, it's fair to say that there are significant expansion opportunities within the existing inventory, on top of the long-term industry growth potential.
Image source: Ventas.
Ventas (VTR 0.77%), one of the largest healthcare REITs with about 1,300 properties, could be a smart way to play it. More than half of the company's properties are senior housing, which should allow it to capitalize on the aging population trend, with additional large holdings in medical office buildings and hospitals.
Like Digital Realty, Ventas has an excellent history of strong results and dividend growth. Over the past decade, Ventas has increased its dividend at a 9% annualized rate, including a recently announced 6% increase for 2016, which should help its income investors outpace inflation by a wide margin.
Shopping centers with recession-resistant tenants
Finally, leading shopping center REIT Kimco Realty (KIM 0.25%) is worth a look. As of the most recent quarterly report, Kimco owns 534 shopping center properties, with 86 million square feet of retail space leased to 4,100 different tenants.
I like Kimco for an IRA investment for a couple of reasons. First, the company's properties are mostly low-risk forms of retail. The majority of the tenants are engaged in businesses that are resistant to competition from internet-based commerce -- think grocery stores and restaurants, places people need to physically go. Many of Kimco's major tenants are recession-resistant as well. In fact, businesses like TJX Companies, Kimco's largest tenant, could do better in a recession as consumers who generally shop at higher-end retailers are forced to cut back. The same can be said for other major Kimco tenants such as Wal-Mart, Ross Stores, and Dollar Tree.
In addition, the market fundamentals look good for shopping centers. New supply has been near a historic low for several years now, while demand for new retail stores for the next couple of years is rising.
Image Source: Kimco Realty.
Finally, with a debt-to-total capitalization ratio of just 33%, Kimco is financially strong, which adds a nice margin of safety for investors.
Since its 1991 IPO, Kimco has averaged an impressive 13.4% total return -- a high level of performance to sustain for more than 25 years. And like the other two stocks I mentioned, Kimco has done a good job of increasing its dividend, with an 8% annualized growth rate.
Invest for the long haul
To be clear, these stocks aren't without risk. In fact, as you can see in the chart, two of the three underperformed the S&P 500 in 2016, and could continue to do so if interest rates rise faster or higher than the market expects. However, these stocks are long-term winners, the kind you buy and leave in your portfolio for a decade or more. So invest in these only if you have a long-term mindset.
