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3 Great Stocks for Your Roth IRA

By Matthew Frankel, CFP® - Jul 27, 2017 at 6:47AM

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A Roth IRA can help you build a retirement nest egg and avoid paying taxes in retirement, but certain stocks are better candidates for tax-advantaged accounts than others.

Real estate investment trusts, or REITs, are especially good Roth IRA investments. Because of their structure, REIT profits are not taxed on the corporate level, which is a big reason REITs tend to pay higher-than-average dividends. The downside is that REIT distributions usually don't meet the definition of "qualified" dividends and are therefore taxed as ordinary income. A tax-advantaged account such as a Roth IRA solves this problem.

You can find excellent REITs that specialize in many different types of commercial real estate -- apartment buildings, offices, shopping malls, hospitals, and warehouse properties are just a few examples. Here's some information about three rock-solid REITs with lots of growth potential that can take full advantage of your Roth IRA's tax benefits, without excessive risk.


Recent Share Price

Dividend Yield

Public Storage (PSA 0.95%)



Store Capital (STOR 0.02%)



Welltower (WELL -1.03%)



Data source: TD Ameritrade. Prices and dividend yields are current as of 7/25/17.

The undisputed leader in self-storage

With nearly 2,600 self-storage facilities, Public Storage has the largest market share in its industry by a considerable margin, and it also has the most recognizable brand name in the business. Many people immediately think of those big orange storage buildings when they hear the company's name mentioned.

Padlock on a storage locker.

Image source: Getty Images. (Image doesn't necessarily depict a Public Storage facility.)

The company has a rock-solid balance sheet and low operating costs, and it does extremely well during strong economies. However, it also does well during difficult times. Even though the self-storage business is more recession-prone than many other types of real estate because of its month-to-month lease structure, self-storage properties -- and Public Storage in particular -- have extremely low maintenance, turnover, and operating expenses, which allows the company to remain profitable in even the worst recessions.

Over the past year, Public Storage has fallen by more than 18%, because of weakness in the REIT sector (rising interest rates are generally negative catalysts for REITs) as well as fears of oversupply in the self-storage industry. However, I see this as an excellent opportunity to buy. The Federal Reserve's forecast for several more rate increases is largely priced in, and Public Storage has the financial flexibility to temporarily undercut the competition while remaining profitable.

The right kind of retail for the long run

Warren Buffett-led Berkshire Hathaway (BRK.A 0.78%) (BRK.B 0.60%) recently purchased a $377 million stake in net-lease REIT Store Capital.

"Net-lease" real estate refers to a type of property in which expenses such as property taxes, building insurance, and certain maintenance costs are the responsibility of the tenant, not the property owner. Net-lease tenants generally sign long-term leases with rent increases built in. This can be an attractive type of investment because it eliminates the variable costs of property ownership and locks a tenant in place for a long period of time.

Most net-lease properties are retail-oriented, which can sometimes make investors nervous, and that's certainly the case with Store Capital. However, most of the company's tenants are in businesses that are e-commerce resistant and/or recession-resistant.

Of Store Capital's 1,750 properties, two-thirds are service-oriented businesses such as movie theaters, health clubs, and early childhood education businesses. These are businesses that people need to physically go to -- hence the e-commerce resistance. Eighteen percent of the portfolio is retail, but most of the businesses have an experiential component, such as furniture, home goods, and hobby stores. In other words, people like to see and touch these types of products before they buy. Finally, the other 15% of Store's portfolio is occupied by manufacturing businesses, which adds another element of diversification to the company's strategy.

Healthcare real estate could grow rapidly

Welltower is the largest healthcare-focused REIT in the market and is also one of the longest-running publicly traded REITs. In fact, since its 1971 IPO, Welltower has delivered 15.3% annualized total returns -- an extraordinary level of performance to keep up for 46 years. Even so, the company's best days could still be ahead of it.

There are a few reasons I love healthcare real estate as an investment right now, and the most significant is the growth potential of the market. With the massive baby boomer generation starting to reach retirement age, the senior citizen population is growing fast and is expected to continue to do so. The average person in the 85-and-older age group spends nearly five times as much as the average American on healthcare expenses, and this segment of the population is expected to double in size over the next 20 years.

Welltower in particular could be a big beneficiary of this trend, as senior housing makes up 70% of the company's property portfolio, one of the largest concentrations of any healthcare REIT.

In addition, the $1.1 trillion healthcare real estate market in the early stages of REIT consolidation -- less than 15% of all healthcare properties are owned by REITs -- and Welltower's size and financial flexibility should give it an advantage when it comes to capitalizing on attractive acquisition opportunities in the existing inventory of healthcare properties.

Matthew Frankel owns shares of Berkshire Hathaway (B shares) and Public Storage. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Public Storage Stock Quote
Public Storage
$355.03 (0.95%) $3.33
Welltower Inc. Stock Quote
Welltower Inc.
$81.84 (-1.03%) $0.85
STORE Capital Corporation Stock Quote
STORE Capital Corporation
$29.23 (0.02%) $0.01
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$456,223.62 (0.78%) $3,526.38
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$303.37 (0.60%) $1.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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