The S&P 500 is one of the most commonly used benchmarks for a stock's performance, and for good reason. This stock market index tracks a weighted list of 500 large companies that represent about 75% of the total market cap of American exchanges, so how this index is doing says a lot about the equities markets.
So far this year, it's not been pretty. The S&P 500 is down about 18% as surging inflation and interest rates and recession fears roil the economy and worried investors pull money out of the market, taking profits that follow years of soaring share prices and creating what could be some serious bargains among these blue-chips.
REITs on the list and on sale
Some of those bargains include real estate investment trusts (REITs), those pools of income-producing properties required by tax law to distribute at least 90% of their taxable income to shareholders. There are 31 REITs in the S&P 500 (a number about to shrink by one when Prologis completes its takeover of Duke Realty).
I own four of them at the moment: Realty Income (O 1.69%), Alexandria Real Estate Equities (ARE 0.11%), Digital Realty (DLR 0.07%), and Crown Castle International (CCI 0.69%). By dint of being in the big index, these companies benefit from the huge amount of investment in index funds that includes indirectly buying their shares, but it's their past performance and future prospects that make them continuing buy-and-holds in my book, and my portfolio.
O Total Return Level data by YCharts
The chart above shows the total return records of each of these REITs and the S&P 500 in the past 20 years, which included the Great Recession and the pandemic. The only laggard is Alexandria, which tracked well with the big index until the recent downturn, which has pushed its price down by about a third, year to date.
This seems oversold to me. Alexandria is a pioneer and major player in the laboratory and life sciences office market and landlord to many of the biggest names in the burgeoning biopharma business, including vaccine maker Moderna's new Massachusetts headquarters. Alexandria raised its dividend in May, continuing a streak of 13 annual bumps that currently put its yield at about 3.1% -- compared to about 1.7% for the S&P 500. Analysts rate it a "moderate buy."
Alexandria's competition is limited to other major developers and property managers that can swing assembling such complex properties. That's an economic moat.
The same is even more true of Crown Castle International and Digital Realty. The former is one of the largest owners of cell towers, and is now investing heavily in the rapid expansion of wireless networks through 5G small cell nodes. The latter is one of the largest owners of large-scale data centers, an essential part of the digital infrastructure spanning the globe.
Digital Realty stock is trading for about $127, down about 28% this year as it takes the same market beating administered to the tech sector in general. But analysts give it a consensus price target of about $165. That's a considerable upside, and 17 straight years of dividend increases have the yield currently at about 3.8%. It has a payout ratio of 66% based on earnings estimates that make continued growth look sustainable while leaving room for continued investment in its growing global presence.
Crown Castle stock, meanwhile, is down about 16% to about $173 a share and yielding about 3.4% after seven straight years of dividend increases. Its payout ratio of 79% based on 2022 earnings estimates is also in line with REIT standards, and the company's heavy investment in the 5G rollout makes it a particularly compelling candidate for investor consideration going forward.
Still relying on Realty Income
Then there's that old reliable, Realty Income. This venerable retail REIT has grown its portfolio to more than 11,000 properties and its record to more than 50 years of consecutive monthly dividends, a record that includes 116 dividend increases and status as a Dividend Aristocrat. Its stock is currently trading for about $72 a share and yielding about 4.2%, with a payout ratio of 74% that should support more steady income from the self-proclaimed "The Monthly Dividend Company."
The chart above shows how well Realty Income has held up this year in share price compared with the other three REITs briefly described here. But prices rise and fall as sectors and companies move in and out of favor. There's good reason to believe all four of these S&P 500 companies will continue providing a steady flow of passive income and good prospects for share price appreciation in the future.
