Real estate investment trusts, or REITs, can be an excellent investment for both income and growth. REITs are required to pay out most of their income as dividends, and can create tremendous shareholder value from development, management, acquisitions, or from simple price appreciation of their underlying properties. And what most investors don't realize is that over long periods of time, real estate has a solid track record of better total returns than the S&P 500 and with lower volatility.
If you don't have exposure to REITs in your portfolio, now could be a great time to consider adding some. For investors who aren't quite sure where to get started, here are some great beginner-friendly ideas for your first $1,000.
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How I'd put $1,000 to work in REITs
I've been investing in REITs for some time -- in fact, the stock I've owned the longest in my personal portfolio is Realty Income (O 0.11%), a REIT that specializes in freestanding retail properties. But if I were getting started with REIT investing from scratch today and had $1,000 to put to work, I'd divide it among these four starter positions.
1. Vanguard Real Estate ETF
If you were to add only one real estate stock to your portfolio, it's tough to make the case against the Vanguard Real Estate ETF (VNQ 0.92%). In a nutshell, this is an exchange-traded fund, or ETF, that owns about 160 different REITs in a variety of real estate subsectors. With a rock-bottom 0.12% expense ratio (investment fee), you'll get to keep most of the fund's long-term returns to yourself.
This is a weighted ETF, so the fund's top holdings include large REITs like Prologis (PLD 0.72%), American Tower (AMT 1.09%), and Public Storage (PSA 0.30%), just to name a few. The idea is that this ETF will give you a well-diversified portfolio of REITs, with a concentration in larger companies, in a single investment, making it a perfect choice for investors just getting started with REITs.
2. Realty Income
As mentioned, I've owned Realty Income for a long time, and I've never sold a single share. The company has been a fantastic long-term compounding machine, with a business that is designed for steady growth no matter what the economy is doing.
The basic idea is that Realty Income acquires single-tenant retail properties occupied by recession-resistant businesses, sign long-term leases with gradual rent increases, and simply collect a growing income stream. Since its 1994 NYSE listing, Realty Income has generated 15.3% annualized total returns for investors, has paid 621 consecutive monthly dividends, and has increased its payout for 98 consecutive quarters.
3. Digital Realty Trust
I've referred to Digital Realty Trust (DLR 1.97%) as a great combination of real estate and technology. This is a REIT that owns and operates data center properties, which can be thought of as the physical homes of the internet. Every time you upload photos to social media, access a cloud-based software program, or view a webpage, all of that data has to physically live on a server somewhere. And that's where data centers come in.
Digital Realty has a massive portfolio of data centers, and its properties are occupied by some of the biggest names in tech. With the amount and sophistication of data flowing around the globe expected to grow exponentially for the foreseeable future, there should be a steady stream of demand for new data centers.
4. Healthpeak Properties
There is perhaps no type of commercial real estate more resilient than healthcare. Even in deep recessions, healthcare is an essential service. Tenants tend to sign very long leases. And with an aging U.S. population, healthcare demand should steadily rise for decades to come.
Healthpeak Properties (DOC 1.21%) is one of the larger healthcare REITs and specializes in three specific property types -- medical offices, life science facilities, and continuing care retirement communities. All three types have performed very well, and should continue to generate year after year of steadily growing income for Healthpeak and its investors.
Invest for the long run
As a final thought, it's important to mention that I like all four of these as long-term investments that should produce excellent returns over time, while still allowing you to sleep at night. I have absolutely no idea what they'll do over the next few weeks or months, and if market conditions deteriorate, they could absolutely face pressure in the short term. But if you buy them and measure your returns in periods of five years or more, I'm quite confident you'll be glad you did.
