Wall Street has a habit of going to extremes on both the upside and downside. When pessimism reigns, you can often find some great companies trading at cheap prices. That's when you want to buy, but you need to go in with a list of names so you have the fortitude to invest when others are despondent and selling. Here are three real estate investment trusts (REITs) that you might want to pick up in the next bear market.
1. The biggest by far
Realty Income (O -0.38%) has the largest net lease portfolio, with a massive 10,000 properties. This is notable because it owns single-tenant properties for which the lessee is responsible for the asset's operating costs. That's high risk at the individual property level, given that there's only one tenant, but when you spread it across a large portfolio, the risk is fairly low. Around 80% or so of rents come from retail properties, with the rest tied to warehouse and industrial assets. The REIT has been expanding its reach into Europe, as well, adding more diversification to the mix.
The company has been an incredibly reliable dividend payer, having increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat. And it pays that dividend monthly, so it's kind of like collecting a paycheck. Realty Income doesn't go on sale very often, but if it does, this net lease bellwether is definitely one worth picking up for conservative dividend investors.
2. The digital future
Digital Realty Trust (DLR 0.34%) is one of the largest owners of data centers on Earth. Its portfolio contains nearly 300 data centers, with locations in North America, South America, Europe, Asia, and Africa. In fact, it just agreed to buy a major data center company in Africa, expanding its reach on a continent that the REIT believes will see material growth in the future.
The data center space is highly competitive and getting more so of late. That's put some pressure on the stock price, pushing the dividend yield higher this year. The yield currently sits at around 3.2%. For investors looking at the property niche, it might be interesting to dig into the story right now. The only problem is that the yield has been higher in the past. If a bear market were to push Digital Realty's yield above 4%, it would be a solid buying opportunity. Above 5% could border on a "back the truck up" moment. The key here, of course, is that Digital Realty is helping its over 4,000 customers step into the digital age. Even with more competition, there's likely to be plenty of opportunity for profitable growth ahead for a REIT that's already amassed a 17-year streak of annual dividend increases.
3. Great at the basics
The last name up is Federal Realty (FRT -0.64%), which owns just over 100 strip malls and mixed-use developments. More than 70% of its properties have a grocery component, which draws customers to its centers on a regular basis. This isn't an exciting business, but it is a reliable one. In fact, you could argue that it is the most reliable REIT you can buy, given its 54 consecutive annual dividend increases... the most of any publicly traded REIT.
What sets Federal Realty apart is that it is highly focused on owning the top-quality assets in highly attractive markets. Basically, it's keyed in on large neighborhoods with wealthy populations. And, on top of that, it constantly invests in its properties to ensure they remain attractive and increase in value. It's kind of like a sharpshooter, given that many of its largest peers have portfolios that are three times the size of Federal Realty's mix of assets. In this case, however, smaller has clearly proven it is better. It doesn't go on sale often, but if the market were to stumble, it would be a good idea to see if Federal Realty gets tossed out with the trash.
Controlling your own emotions is probably the hardest part of investing. And when the market is selling off, it is hard to step back, take the contrary position, and buy. That's why you should prepare a list of stocks you would like to own if only they were cheaper. Realty Income, Digital Realty Trust, and Federal Realty are three you should look at today and put on the "to buy" list for the next market downturn. That way, when the time comes, you'll be ready to pounce.