Index funds are not only a long-proven way to invest in the equities markets: The indexes these funds replicate serve as standard benchmarks for measuring performance. Take the Dow Jones Industrial Average and the SPDR Dow Jones Industrial Average ETF, for instance.
While it's not unusual for managed funds and paid stock pickers to trail the performance of passive index stocks, individual investors also have good choices among equities with records of outperforming those benchmarks. The two I'll highlight here are both real estate investment trusts (REITs): Agree Realty (ADC 1.31%) and Blackstone Mortgage Trust (BXMT 1.15%). REITs hold pools of income-producing assets and carry the obligation of paying at least 90% of their annual taxable income to shareholders in the form of dividends.
Agree and Blackstone are very different companies, though. For starters, Agree is an equity REIT that owns real estate directly while Blackstone is a mortgage REIT (mREIT) that owns loans. But the two do share this: they both have significantly outperformed the Dow for years.
Turning the tables with total return
For the two tables below, I used the Dow Jones Composite Average total return index, which comprises the 30 stocks in the Dow Jones Industrial Average, 15 from the Dow Jones Utility Average, and the 20 stocks in the Dow Jones Transportation Average. I chose total return as the barometer because the combination of dividend payout and share price shows the true impact of owning a stock, a critical measure if you, like me, are interested in passive income as an investment strategy.
First, let's take a look at total returns year to date. While Blackstone's mREIT is down about 6.3%, it's not down as much as the Dow's 15.7% drop. Agree's performance is even more -- ahem -- agreeable, with a total return in the green, a true rarity in these turbulent times.
The next chart shows 10-year total returns, which zooms out from the current downturn, puts more recent price dips in perspective, and highlights the two REITs' track records of outperformance. This time span is essential to keep in mind, especially if you're someone who favors stocks that you can buy and hold comfortably for the long term.
Agree Realty keeps growing its payouts and portfolio
Agree Realty is a Detroit-based, family-founded, and family-led retail REIT that owns more than 1,500 shopping centers across the country and has generated a compound average annual return of about 12.5% since it went public in 1994. The company also began paying out monthly instead of quarterly in January 2021 and has raised its dividend four times since then, giving it a current yield of about 4%, compared with about 1.9% for the Dow.
Agree's core funds from operations (FFO), a critical measure of how a REIT manages its cash, rose about 11% in 2021 and then 15.5% year-over-year in Q1 22. That, plus a portfolio that grew by 124 properties in the first three months of the year, points to more income and more profits to be shared with investors in the months and years to come.
Blackstone Mortgage Trust is positioned to cash in on rate hikes
Most mREITs make their money by buying pools of mortgages, especially residential mortgages through the government-sponsored agencies like Fannie Mae and Freddie Mac. Blackstone Mortgage Trust, on the other hand, is more of a direct lender, originating senior loans collateralized by commercial real estate on three continents. It's also part of Blackstone (NYSE: BX), sharing the resources of one of the world's largest asset managers.
Blackstone's mREIT has been a consistent performer. While it hasn't raised its dividend since 2015, the payout is still good, cashing in at a current yield of about 8.5% with a share price of about $29. That's an inflation-beating yield, and that's not the only inflation-fighting attribute of this portfolio. While most other mREITs contend with the effects of rising interest rates on fixed-rate mortgages, New York-based BXMT has a portfolio that's 99% floating rate, meaning it can roll with the rising tide of interest rates.
CEO Katie Keenan noted this benefit in BXMT's quarterly report from April: "Looking ahead, we believe our low-leverage, floating-rate transitional loan portfolio is especially well-positioned for the current environment, with our earnings set to benefit as interest rates move higher."
Different ways to beat the Dow while paying dividends to shareholders
Agree Realty and Blackstone Mortgage Trust are very different organizationally and structurally, but both have outperformed major indexes like the Dow and have the portfolios and potential to keep doing the same moving forward.
