Buying and holding for the long term is one of the best ways to maximize an investment in the stock market. Holding for 10, 20, or 30 years or more gives you the best opportunity to see share prices grow or earn more dividends.
But holding a stock forever isn't something most investors think about when buying. There are very few stocks I think people would say they plan to never sell. But for me, real estate investment trust (REIT) Invitation Homes (INVH +3.42%) is a stock I never plan to sell. Here's why.
NYSE: INVH
Key Data Points
1. Demand will never die
Invitation Homes is a residential REIT that owns and leases single-family rental properties, primarily in the Sun Belt of the United States. The Sun Belt is one of the fastest-growing regions in the country and is expected to house the majority of the U.S. population by 2030.
Aside from its tremendous portfolio of more than 75,000 homes in some of the hottest housing markets across the South, the single-family rental business model is extremely compelling because single-family homes will never go out of style. There will always be a need for rental housing.
Even if the rental market experiences a slowdown, which happens from time to time, the REIT always has its portfolio of single-family homes to rely on which can be liquidated to improve its financial position. Plus since the single-family market has a wider pool of buyers, it's less susceptible to pricing effects compared to apartments or larger multifamily buildings, which are almost exclusively owned by larger investors and investment firms.
2. Its strategic partnerships give it a lot of room to grow
Invitation Homes acquires properties in a variety of ways. It buys from the multiple listing service (MLS), buys from potentially distressed owners, buys bulk real estate owned (REO) properties, and even purchases from the foreclosure steps. But its biggest opportunity seems to be its partnerships with single-family developers.
In 2021, Invitation Homes announced its partnership with PulteGroup (PHM 2.57%), which is expected to deliver 7,500 homes to the REIT over a five-year period. These homes are built to rent and will help the company reduce its costs by going directly to the source and reducing competition in pricing. As of first-quarter 2022, the company was in the process of closing on 1,500 homes from PulteGroup, which will complete later in the year.
I like that Invitation Homes uses a diversified acquisition model to help it grow. With $1.5 billion and a relatively healthy debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of six times, it's in a good position to keep growing.
3. Its dividend is extremely safe
Since REITs are required to pay 90% of taxable income out in the form of dividends, they're attractive stocks to hold for the long term because of the competitive returns. Invitation Homes doesn't have a huge dividend yield like some of its peers. Right now its dividend yield is around 2.20%, which is above the S&P 500, but nowhere near the REIT average of 4%. However, I have peace of mind knowing it's an extremely safe dividend.
Invitation Homes is a rather young REIT, having gone public in 2017. So its low dividend is acceptable because it's focusing its efforts on growing its portfolio without compromising its balance sheet. Given that its payout ratio is 55% of Funds from Operations (FFO), it has a lot of room for future dividend increases without compromising its financial position.
Over the last five years, it's provided an annualized return of just over 13%, and I don't think it's anywhere near done growing. But forever is a really long time. While Invitation Home's core business and fundamentals give me reason to want to hold for the long term, things can change. Poor management choices like overleveraging its acquisition efforts by taking on too much debt could impact the fundamentals of its business and cause me to alter my position in the future. However, I'm still very bullish on the company and thing today's pricing makes it an attractive buy for new investors.
