Real estate investment trusts (REITs) are fertile ground for income investors, especially those investors who are older and need to focus on income and capital preservation.
Many of these companies follow a landlord/tenant model. REITs can contain office space, retail space, cellphone tower capacity, or even forests. To qualify as a REIT, these entities are required to distribute the great majority of their earnings as dividends, and in return, they pay limited federal taxes.
Here are two top REITs for income investors who are considering this area.
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1. American Tower is an income stock with a great long-term growth story
American Tower (AMT -0.70%) is a cellphone REIT, which is benefiting from the increase in mobile data usage. The company builds cellphone towers and then leases capacity on these towers to mobile phone companies, cable companies, and governments.
Demand for mobile data has been growing as more people use video on their cellphones, and according to some studies is expected to increase more than four-fold by the end of 2027. Much of this will be driven by increased use of 5G.
American Tower has been branching into the data center business and recently bought data REIT CoreSite. Data center REITs generally offer cloud services and hosting for big data users, and such acquisitions are complementary to American Tower's core tower business.
American Tower has been growing at a healthy clip (revenues up 16% in the second quarter of 2022), and the company has a record of consecutive quarterly dividend increases going back to 2012. This gives American Tower the best of both worlds for an income investor: a long-term growth story and steadily increasing income. At current levels, the dividend yields 2.3%.
2. Realty Income is a highly conservative income stock that focuses on triple net leases
Realty Income (O -0.17%) is a REIT that specializes in single-tenant properties under long-term leases. These leases are generally long-term and have automatic rent escalators. The leases require the tenant to absorb most of the operational costs of the property, including taxes, maintenance, and insurance.
This type of lease is called a triple net lease, which is different from the gross lease that most people are familiar with. A gross lease requires the tenant to pay rent, but the landlord handles the other costs. Given that these leases are long-term, proper tenant vetting is a must. Almost half of Realty Income's tenants carry an investment-grade credit rating.
While most REITs were cutting their dividends during the pandemic, Realty Income increased its monthly dividend three times during 2020. The typical Realty Income tenant is a drugstore, convenience store, or dollar store. During the COVID-19 pandemic, these businesses were considered essential businesses and permitted to remain open. While some of Realty Income's tenants were forced to close temporarily (especially movie theaters and fitness centers), Realty Income fared better than mall and outlet REITs.
Realty Income is a stalwart, with a 28-year record of consecutive annual dividend hikes, which makes it a Dividend Aristocrat. The stock is one of the safest REITs out there and should be a core holding for an income investor. At current levels, it has a dividend yield of 4.4%.
