During a bear market, almost every stock is vulnerable to multiple compression, which happens when investors put a lower multiple on a company's earnings stream. There is little an investor can do to avoid this phenomenon since market timing is a fool's errand.
Choosing companies based on relative cheapness is often fraught with peril, as many companies are cheap for a reason. The best strategy is to choose companies with solid business models and competitive advantages. Here are some real estate investment trusts (REITs) which are leaders in their chosen markets and have characteristics that make them safe investments.
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1. Demand for mobile data will only increase over time
American Tower (AMT 1.17%) is a cellphone tower REIT which is part of a highly concentrated industry with Crown Castle International (CCI 0.98%) and a few other, much smaller, players. The two companies control most of the cellphone towers in the United States, which is a market with high barriers to entry. American Tower provides services primarily to cellphone companies, cable companies, and governments. American Tower's customers are highly stable businesses, and many of American Tower's contracts have long terms and automatic rent escalators.
American Tower's business model is being driven at least partly by the trend of increasing demand for mobile data. According to some studies, demand for mobile data is expected to grow 27% per year through 2027 as 5G is rolled out and applications grow to take advantage of it. American Tower has branched out into the data center business and sees this as another growth opportunity. American Tower is one of those companies that can be considered a growth stock and an income stock. One interesting fact is that American Tower is one of the few companies that has raised its dividend every quarter since 2012. Pretty impressive.
2. Realty Income is a classic triple-net lease company that has a long track record of dividend hikes
Realty Income (O 0.64%) is a triple-net lease REIT that builds and operates single-tenant properties for extremely stable companies. Most investors are familiar with the concept of a gross lease, which resembles the typical apartment lease. Triple net leases typically have longer terms and require the tenant to pay for more expenses such as taxes, maintenance, and insurance. Since these commitments are so long, the stability of the tenant's business is a key consideration. The ideal tenant for Realty Income would be a drug store, dollar store, or convenience store. Even if the economy hits a recession, people will still need medicine and paper plates.
Realty Income was one of the few REITs that performed well during the COVID-19 pandemic. Most of its tenants were considered essential services and were permitted to remain open. The company did have some issues with its theater and fitness club tenants. However, the company was still able to hike its dividend three times in 2020. Realty Income is considered a Dividend Aristocrat, which is a group of dividend payers that have a long track record of hiking dividends every year. Given the stability of Realty Income's business model, it should be considered a core holding for most income investors.
