Buying and holding stocks for the long term is a proven way to help build retirement savings. Getting behind stocks and trends that have long-term growth opportunities can exponentially compound your savings. But if you add in the benefit of dividend payments, it's like you're doubling your money-making abilities.
Dividend stocks are some of the best stocks to buy for a retirement portfolio because they provide a consistent passive income stream. And due to the power of dividend growth, a small investment today could lead to huge earnings 10 to 30 years from now. But the key to buying dividend stocks is choosing ones that can deliver long-term consistency.
Here's a closer look at Realty Income (O +0.24%), Alexandria Real Estate Equities (ARE +1.38%), and Invitation Homes (INVH 0.83%), three stocks Fool.com contributors believe are ideal to buy and hold until your retirement years.
Increase your retirement passive income with the monthly dividend company
Mike Price (Realty Income): Real estate investment trusts (REITs) are, by nature, dividend payers. The best of them are reliable dividend payers. And then there's Realty Income. Realty Income is a Dividend Aristocrat, which means it's an S&P 500 company that has increased its dividend for at least 25 straight years -- 28 years in Realty Income's case. Its consistent performance and monthly dividend payments have led to a 15.1% compound annual total return for shareholders since it went public in 1994.
The REIT is the fourth-largest in the world with $3.1 billion of annualized base rent, 53 years of operating history, and a substantial portfolio (totaling $5.8 billion) in Europe. It is a net lease retail REIT, which means it leases retail buildings to clients under a structure where the clients are required to pay for expenses such as insurance, taxes, and maintenance.
This frees up the company to spend time and capital growing. Earnings per share (EPS) have grown in 25 of the last 26 years. Management focuses on properties with strong existing tenants that have nine or more years remaining on a net lease that had an original term of greater than 10 years. Through the first six months of 2022, the company evaluated $60 billion of potential opportunities and purchased just $3.2 billion.
NYSE: O
Key Data Points
According to a recent investor presentation, potential investments must pass a variety of filters, including the location, price versus replacement cost, financial analysis of the tenant, and fit in the REIT's general strategy. Each investment is presented to an investment committee that makes the final decision.
Finally, the main weakness of most REITs right now is exposure to interest rate risk because they rely on debt financing to grow. Realty Income projects a long-term capital structure that is 65% equity and just 35% debt. If competitors are priced out of the market by rising interest rates, Realty Income will have the balance sheet strength and liquidity to scoop up underpriced properties, and its investment strategy will continue to produce market-beating returns.
Low drama plus steady dividends equal retirement-worthy REITs
Kristi Waterworth (Alexandria Real Estate Equities): Retirement is more than a few years away for me, but it's not that far off in the grand scheme of things, so I'm looking more and more into stocks that I can hold until the day I finally get to put the period on my last sentence. One of the stocks that I've bought this year that I absolutely will be holding until retirement (and adding to) is Alexandria Real Estate Equities.
Alexandria Real Estate Equities is a unique sort of REIT specializing in providing rental space for life sciences research facilities and tech firms, largely in cluster models that group different companies together on shared campuses. The idea is that this design helps to facilitate collaboration between unlike research facilities or direct competitors to yield something wholly new and better. So far, the model seems to be working well for Alexandria Real Estate Equities and its tenants because the company has been growing steadily for decades.
Currently, Alexandria Real Estate Equities has over 1,000 tenants, with 50% of its annual rental revenue coming from investment-grade and publicly traded companies. These aren't flash-in-the-pan fly-by-nights.
Among its top 20 tenants by annual rental revenue, you'll see names that you already know, like Moderna, Merck, and even Uber Technologies. These tenants are locked into long leases, building a stable rental income base for Alexandria Real Estate Equities. On average, the top 20 tenants have leases with 7.458 years remaining (excluding Uber, which has more than 60 years remaining on its lease). Some are much longer, like Moderna, which has 15.1 years left, Merck, with 10.4 years remaining, and The Children's Hospital Corporation, with 14.3 years to go. These top 20 tenants make up 31% of aggregate annual rental revenue.
NYSE: ARE
Key Data Points
These steady and constant tenants have created a steady and constant income stream. Free cash flow for the three months ending June 30 was $338.81 million, up from $282.25 million for the same period in 2021. That's a 20.04% increase in just one year. Due to this, the dividend has also been increasing steadily, in both the long and short terms. For the short term, the dividend yield was 3.3% for the three months ending June 30, versus just 2.5% the same period a year before. This is also a long-term trend, as the dividend has been growing at an average annual per-share rate of 6.8%. In 2013, for example, the dividend was $2.61 per share, and it is projected to be $4.72 per share in 2022.
When I think about stocks that I want to take into my retirement, what I'm thinking about are stocks with steady growth (not explosive, unsustainable growth), reasonable dividend yields, and long-term planning that will ensure they manage to stay on track. Alexandria Real Estate Equities ticks all those boxes for me.
A time-tested business with growth opportunities
Liz Brumer-Smith (Invitation Homes): Housing, in its nature, is the most essential service in our modern economy. Everyone needs a place to live. And in the wake of the pandemic, single-family rental housing is becoming the dominant choice.
Invitation Homes is the largest single-family rental operator in the country, having interest and ownership in roughly 75,000 single-family rental homes. Its portfolio is largely located in the Sun Belt, which includes fast-growing and high-demand markets like Phoenix, Atlanta, South Florida, Tampa, Southern California, and Orlando, along with a few others.
The past few years of low housing supply have meant business is booming. Its occupancy sits at 98% and its rents have increased by nearly 12% over the last year. Since its initial public offering in 2017 the company has managed to grow its funds from operations by 412% producing a total return of nearly 15%, outperforming the S&P 500.
NYSE: INVH
Key Data Points
The company has key strategic partnerships with home developers and a robust acquisition model to help it continue growing. The young REIT has been very focused on growth over the last five years and kept a low dividend yield of around 2%, conserving capital to fuel its growth. However, its low payout ratio of 57% means the company has more than enough room to increase payouts in the future as it slows down on its expansion efforts.
Over the last five years, it raised its dividend seven times, totaling a 266% increase in dividend payouts. While this stock could take a while to pay off, it's the ideal REIT to buy and hold for retirement due to its growth potential and reliable business model.
