If you are building a portfolio for early retirement, you are going to need a combination of growth stocks and income stocks. As a general rule, real estate investment trusts (REITs) provide solid income opportunities, but they are not often thought of as fast growers when it comes to price appreciation. This is because REITs are required to distribute 90% of their earnings as dividends, which means reinvesting in the business is more difficult.
That being said, there are exceptions to the rule. Here are two REITs that pay out solid dividends, but also have good longer-term growth potential.
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1. American Tower: Demand for mobile data will only grow
American Tower (AMT -0.70%) is a long-term play on the increasing use of data. The company is known primarily as a cellphone tower REIT, but it has recently announced a tender offer to acquire data center REIT CoreSite Realty (COR). The acquisition of CoreSite gives American Tower access to data centers, cloud access, and interconnection services in some of the biggest markets in the U.S.
American Tower is part of what is more or less a duopoly as it relates to cellphone tower REITs. It leases capacity on these towers to cable companies, mobile phone companies, and governments. The barriers to entry in the cellphone tower business are huge, and the market is dominated by American Tower and Crown Castle International (CCI -0.67%).
The big trend driving American Tower's business is increased demand for data. On its third-quarter earnings conference call, American Tower CEO Tom Bartlett cited industry experts that forecast a 25% cumulative average growth rate in mobile data usage over the next five years. The industry sees the 5G rollout as the big driver for increased data usage.
American Tower has been growing rapidly for years and has increased its dividend every quarter since 2012. Given its stable business model and long-term growth prospects, American Tower is a good stock on which to build a retirement portfolio.
2. Prologis: Benefitting from a sea change in attitudes about inventory
Prologis (PLD 0.69%) is a REIT focused on logistics. It buys massive warehousing spaces along major arteries in the U.S. If you drive along I-95 on the East Coast, you will see massive facilities with dozens of truck bays. Many are owned by Prologis. These places generally store inventory, especially for e-commerce companies. Prologis's biggest customers include Amazon, Home Depot, FedEx, and UPS.
One of the biggest lessons learned from the COVID-19 pandemic has been that corporations have been sitting on too little inventory. Historically, companies were encouraged to minimize inventory, since doing so reduces costs and allows the company to run more efficiently. This works if supply chains are operating as designed.
The COVID-19 pandemic exposed the flaws in this approach. Many retailers found themselves with limited inventories, and manufacturers like automakers were impacted by chip shortages. The lesson from the pandemic is that Corporate America simply didn't have enough inventory to weather shocks to the system.
So if most of Corporate America is increasing the amount of inventory it holds, that inventory has to be stored somewhere, preferably close to big population centers. This is one of Prologis's biggest advantages: It has its facilities in some of the most congested markets. This means high real estate prices and therefore limited competition.
On earnings conference calls this year, Prologis CEO Hamid Moghadam has stressed that demand for logistics space is the highest he has seen in his career. The increase in inventory demand will take several years to play out, and rental rates are rising. Prologis estimated that as of Sept. 30, 2021, the rental rates on its lease portfolio are 21.9% below market value. This represents a lot of future growth for the company with its assets already in place. Prologis will be at the center of a sea change in corporate attitudes regarding inventory, which gives it a great longer-term story.
