It has been long said that real estate is a good hedge against inflation, and that investing in it can help diversify a portfolio to better handle down markets. But the term "real estate" covers a lot of ground, and real estate stocks haven't fared much differently than the broader stock market of late.
Still, many of those stocks have impressive track records of dividend payouts and long-term total returns that make them good choices to consider now, especially if you focus on strong companies in growing markets. Here are two of those trendy sectors investors might consider for plunking down $1,000 now.
Multifamily growth
Commercial real estate services giant CBRE forecasts that new household formation will continue driving demand for rentals, and it expects multifamily occupancy rates staying above 95% nationally for the foreseeable future. Rent growth is expected to moderate, but that high level of occupancy will keep the rental income flowing, and there are multiple ways to capitalize on that opportunity.
Those include: buying rental properties outright and either managing them yourself or hiring a property manager or management company; buying property through partnerships or pools from syndication platforms like RealtyMogul or CrowdStreet; or perhaps -- easiest and most liquid of all -- investing in publicly traded real estate investment trusts (REITs).
A good example of the latter, one I'm considering buying soon, is Essex Property Trust (ESS 0.51%) an owner-operator of upscale apartment complexes in hot West Coast markets where home prices have soared.
By law, REITs are required to return at least 90% of their taxable income annually to shareholders as dividends, and Essex is a true payout machine with a record of 29 straight years of increases. As such, it's a Dividend Aristocrat.
Essex stock, meanwhile, is down about 27% year-to-date pushing its yield up to about 3.4% and its price-to-funds from operations (FFO) per share ratio down to a moderate 17.6. FFO is a good indicator of dividend sustainability and Essex's current payout-to-earnings ratio of about 57% based on 2022 estimated earnings also makes continued dividend performance look quite sustainable.
EQIX Total Return Level data by YCharts
Digital infrastructure growth
According to the researchers at Future Market Insights, the international 5G technology market will grow at a compound annual rate of about 72% over the next six years. That's a pretty heady pace, and while digital communications networks may not typically be thought of as real estate opportunities, they are.
There are two great examples of how real estate investing comes into play here: data centers and mobile communications infrastructure. Both provide the physical frameworks for the transmission of the vast and fast-growing amounts of data needed to support e-commerce, smart buildings and smart cities, gaming, streaming, and the billions of phone calls made each day on cellular networks.
Two stocks to consider in this space are American Tower (AMT 0.17%) and Equinix (EQIX 1.10%). Both are REITs and the biggest of their kind. American Tower has a global network of more than 220,000 mobile communications sites on six continents. Equinix has about 240 data centers worldwide. Both are essential providers of infrastructure that underpins the digital economy. They have been thriving for decades, and they probably will continue to prosper for a long time to come.
American Tower stock currently carries a price/FFO per share ratio of about 21.4 after seeing its stock price fall about 14% year to date. The market is valuing Equinix stock a bit higher by that measure, at a ratio of 26. Its share price is down about 22% year-to-date. American Tower dividend yield is about 2.3% while Equinix's about 2%. Their payout ratios based on 2022 earnings estimates also are very sustainable: about 54% for American Tower and 44% for Equinix, respectively.
There are REITs and other stocks that pay higher yields, certainly, but both these companies occupy sectors with high barriers to entry and a level of indispensability to their clients that gives each of them a moat around their business and room to grow going forward.
A three-way tie? Invest in each.
These two types of real estate -- multifamily and digital/mobile infrastructure -- are in strong demand, and there are good reasons to believe that those trends will continue. If you've $1,000 to commit to now and are looking for smart picks, I'd recommend splitting that money equally among Essex Property Trust, American Tower, and Equinix. Given their depressed share prices and their positive prospects, those investments should do just fine.
