If you're working toward FIRE (financial independence, retire early), real estate can be a crucial cog in your wealth-building machine. However, you don't need to buy houses or buildings to get the perks of ownership. Real estate investment trusts (REITs) are great options for investors who want to invest in real estate without owning any property.
REITs are known for their dividends, but these three high-growth REITs offer enough upside to help you reach financial freedom; you may even be able to retire early.
But first -- how REITs can benefit you
Real estate investment trusts (REITs) are a specific type of company that acquires and rents out real estate. It's required to pay out at least 90% of its taxable income as dividends to investors and avoids corporate income taxes by doing so.
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Congress invented the REIT company structure decades ago to allow investors to own real estate without actually having to buy property outright.
REITs come in many flavors, ranging from residential homes to retail properties, data centers, shopping malls, and industrial complexes. A REIT will typically focus on one type of real estate, so you can build a diverse portfolio by owning a handful of different REIT stocks.
1. Visiting the cannabis industry
Businesses in the U.S. cannabis industry can't get traditional financing because cannabis is illegal at the federal level. Innovative Industrial Properties (IIPR 0.28%) solves this for cannabis operators by buying their property from them -- which gives the cannabis company much-needed funds -- and then leasing it back to them. In other words, Innovative Industrial helps cannabis companies convert their property into capital needed to fund their business.
Innovative Industrial Properties has rapidly expanded its portfolio, going from nothing to 105 properties in six years. The company recently reported its fourth-quarter 2021 earnings and funds from operations -- the cash flow that REITs generate -- rose 78% year over year (YOY) to $178 million.
This rapid growth has also translated to the dividend, which management raised 28% in 2021. The dividend yield is currently 3.2%, which seems very attractive considering the company's strong growth. Cannabis is still a young industry with additional state-level legalization likely to take place over the coming years, making Innovative Industrial Properties a REIT poised for solid growth.
2. To paper and beyond
Everything seems to be digital nowadays, but many don't realize that physical records still serve a significant role for many businesses worldwide. Iron Mountain (IRM -0.97%) is the king of owning and operating paper-record storage facilities. Its portfolio spans the globe and includes 1,460 facilities and 225,000 customers. Iron Mountain's dividend yields 4.9% today, and management has raised the payout over the past 11 years.
Iron Mountain makes most of its money from charging companies to store physical records and securely shredding them when needed. The business has proven stable; records stay for an average of 15 years once they arrive at a facility. And the company has low turnover, retaining 98% of its customers in a given year.
However, digital is the future; Iron Mountain is steadily investing in data centers to transition its business as demand for physical record storage eventually declines. It operates 19 data centers, and that will probably increase. The company is growing at a healthy clip, despite paper records being a "boring" business to be in. Iron Mountain's funds from operations increased 14% YOY in 2021.
3. Growing with e-commerce
E-commerce is a digital experience for the consumer, but physical infrastructure makes it possible to receive goods at your door with the click of a mouse. STAG Industrial (STAG -1.29%) is a REIT that focuses on industrial properties, but e-commerce is its largest segment: 40% of STAG's business involves e-commerce properties.
The company's dividend yields 3.7% at its current stock price, and the payout has increased for the past eight consecutive years. However, management is still focusing on driving growth. It owns 544 properties across 40 states and has roughly $4.1 billion of future property acquisitions in its pipeline. It acquired 35 new properties just in its most recent quarter (Q4 2021), so investors should expect STAG's portfolio to keep expanding.
E-commerce will likely remain a core focus for STAG, and there's a lot of growth in the industry to come. Retail in the U.S. is so big that e-commerce still accounts for just 13% of sales. There will be a need for more distribution centers and other buildings, driving STAG's business. The company's funds available for distribution, or profits available to fund dividends, grew 20% YOY in 2021 to $294 million, showing that growth is healthy.
