Diversification has been called the only true free lunch in investing. Many investors understand that mixing uncorrelated stocks (e.g., technology, real estate, and bank stocks all in the same portfolio) reduces risk over time. But what about geographic diversity? What percent of your portfolio is invested outside your home country?
It's normal to focus on stocks that do business where you live; it's far easier to keep them in your circle of competence that way. But investing in domestic stocks that have a lot of foreign revenue is a good way to keep your portfolio diversified. In the same way, a macro event may affect technology and bank stocks differently, it could stunt the business of a stock's U.S. division while not affecting its European division.
1. Realty Income
Realty Income owns more than 11,000 properties that are net leased to tenants. This means the tenant is responsible for paying all maintenance, tax, and insurance costs related to the property. The REIT is the sixth-largest in the MSCI US REIT index and owns properties in all 50 states, Puerto Rico, Spain, and the United Kingdom.
Realty Income is a Dividend Aristocrat, which means its dividend has grown in at least 25 consecutive years; in Realty's case, for the last 27 years. The REIT prides itself on paying a consistent monthly dividend. Right now, the annual dividend yield is 4.65%.
The company first expanded internationally in 2019 and believes continental Europe has double the addressable market of the U.S.. Additionally, borrowing costs for the REIT have been lower in the U.K. than in the U.S. Look for future growth to come from international expansion.
The REIT currently owns $5.1 billion worth of property in Europe, with an average remaining lease term of over 10 years. The REIT's domestic portfolio totaled around $31 billion at year-end 2021, and while its international portfolio isn't close to a majority of assets yet, it should impact the company going forward.
Realty Income has paid a dividend in the last 617 consecutive months. Investors who buy now will receive consistent monthly income and some geographic diversification.
2. Public Storage
Public Storage is the largest self-storage REIT and the fourth-largest REIT (by enterprise value), according to the company. It currently owns 2,797 properties with 199 million rentable square feet, and it has 1.8 million customers.
The REIT has international exposure through equity ownership of Shurgard Self Storage, which owns 253 properties that have a total of close to 14 million rentable square feet in seven European countries. Shurgard's revenue grew 18% from 2019 to 2021, and net operating income grew 19%.
Like Realty Income, Public Storage's foreign exposure isn't its main focus. But it is a growing business that gives the REIT strong internal diversification if the U.S. market weakens.
Public Storage's business model is also useful for shielding your profile from inflation. Because its lease contracts are usually month-to-month, it can increase prices along with inflation. Additionally, its 2.56% dividend gives you a baseline return to fight off purchasing power losses.
3. Digital Realty Trust
Digital Realty is a data center REIT and has a few things in common with the other two REITs. It has increased its dividend for 17 straight years and is one of the 10 largest REITs (currently seventh) in the world.
Digital Realty owns properties in 26 countries on six continents. It has over 4,000 customers in 50 metro areas across the globe. Though it has a presence in the U.S., what sets it apart from Public Storage and Realty Income is that it has already gone all-in on global expansion.
That expansion is working. The REIT grew rental revenue 80% from 2017 to 2021. Despite that growth, the stock is down more than 25% on the year because of its close relationship with the tech industry. That relationship usually makes Digital Realty too pricey for many income investors. Its five-year average P/E of 84 and P/B of 2.9 are well above what you'd normally pay for a REIT.
The stock currently trades for 26 times earnings and 2.13 times book value. Both ratios are still above REIT averages, but most REITs don't grow 80% in five years or have exposure to markets on six different continents.
Start in the U.S.
Each of these REITs has more exposure -- sometimes far more -- to the U.S. market than to any foreign market. Eventually, you may go all-in on foreign investments and purchase foreign companies directly on foreign exchanges. However, starting with U.S. companies that have exposure to foreign markets, and thus offer you some protection from a U.S. market correction, is a good first step.