According to the U.S. Bureau of Labor Statistics, the inflation rate of 7.5% over the past 12 months is the highest it has been over any 12-month period since 1982. That means that if your investments went up less than 7.5% over the past year, your portfolio lost purchasing power.
And there's little sign of inflation slowing down. The supply chain still has issues, the money supply is still growing, and now war fears are impacting investor sentiment. It may be time to add some defensive stocks to your portfolio.
One of the best way to play defense against inflation is with real estate investment trusts (REITs), which acquire and lease real estate. In exchange for paying out at least 90% of net income to shareholders, REITs don't have to pay corporate income taxes. During inflationary periods, not only can REITs benefit from rising real estate prices, but their dividends give investors some extra income.
1. Equity Residential
Home prices have led the way as consumer inflation jumped over the last year. The median sale price for an existing home rose 17% in 2021. . Though increased interest rates may slow down inflation in home prices, it's unlikely that they will fall far anytime soon. If people are priced out of the homebuying market, that plays right into Equity Residential's hands as it owns and leases multifamily buildings, i.e., apartment complexes.
It focuses on affluent markets and owns 307 properties housing 79,322 units. The higher home prices get, the more likely it is that people have to rent apartments. And as more and more businesses move back to full-time in-office work, more people will be renting apartments rather than buying a house in the suburbs, as many were doing when the pandemic first started pushing people out of offices.
The REIT recently sold $1.02 billion of property with an average age of 30 years in places like California and moved the money into newer properties in places like Austin, Texas; and Denver, where it plans to rent to more affluent people. It's also taking advantage of interest rates while they're still low to commence construction of close to $2 billion of new developments in those same markets. Its move to focus on different geographies and newer properties will support the business in the long run, once increased demand from inflation dries up.
Equity Residential has been a favorite of many investors for years because of its chairman, Sam Zell, who is a legend in the real estate arena and has created billions of dollars of value over the years. Right now, his company looks like it will enjoy a tailwind from rising home prices, and it pays investors a 2.8% dividend yield.
2. Medical Properties Trust
Healthcare is often touted as a recession-resistant industry; no matter what's happening to the economy, it's something people need. You can go further and say that people will keep paying for healthcare and that means healthcare providers will be able to keep paying their landlords, and the landlords will be able to raise rents.
Medical Properties Trust is a REIT that focuses on medical properties. It owns 438 hospitals and clinics in nine countries and 32 states. It is already one of the biggest owners of hospitals in the world and still has plenty of room to run with an asset base of around $22 billion, with $12 billion of that added in just the last three years.
The REIT charges a base rent to hospital operators and leaves management up to them. It has a weighted average interest rate on its debt of just over 3%, and 84% of that is locked into fixed rates. That means as interest rates are increased in an effort to combat inflation, Medical Properties won't have to deal with a sudden rise in debt payments.
Additionally, the REIT builds in significant rent escalations to its lease contracts. While other REITs could be stuck with long-term fixed leases and rising expenses, Medical Properties already has revenue growth built in to its contracts.
The company grew funds from operations (FFO) 11% last year and currently sports a dividend yield of 5.7%. It has a unique combination of growth prospects and dividend yield that you don't see often in the stock market.
3. Gladstone Land
Unlike the other two REITs on this list, Gladstone Land's dividend yield is a pedestrian 1.7%. You don't often see mature, successful REITs with dividend yields below 2%. There's a good reason for that, though -- the price has shot up by over a third since September last year, and there's potential for it to go up even more.
Gladstone owns 108,000 total acres of farmland across 159 farms in 14 states. It leases the farmland to farmers on a triple net basis; the farmers have to pay for insurance, maintenance, and property taxes. The REIT focuses on farmland used to grow fruits and vegetables, not grains, corn, or soy, because of lower storage costs and less price volatility.
Gladstone's leases are made on five- to 10-year terms but include annual escalations, and many include upward market adjustments or participation features. This means part of farmers' profits from increased food prices get passed along to the REIT, but when food prices go down, the base rent stays the same.
The market has already realized Gladstone's potential to shield investors from inflation, and the stock price has soared and the dividend yield has cratered because of that. That said, a yield of 1.7% is still about half a percentage point higher than the S&P 500's average yield and you can expect the yield to increase over time. Continued inflation that drives up the price of food should lead to increased revenue for Gladstone and increase the value of its thousands of acres of farmland even more.
Don't get "swindled by inflation"
Warren Buffett's first communication with the financial public came through an article called "Inflation Swindles the Equity Investor" back in 1977. At the time, inflation was as high as 8% and wouldn't peak for five more years.
Investing in REITs like the ones in this article could b a big step toward not allowing inflation to swindle your portfolio as they look primed to keep succeeding and sending dividends to investors.