One definition of exceptional is "to go beyond the norm." For a stock, that means it should exceed expectations and deliver outstanding results compared to its peers. That's precisely what Realty Income (O 0.55%), Hannon Armstrong Sustainable Infrastructure Capital (HASI 1.76%), and Alexandria Real Estate Equities (ARE 2.49%) are doing.
These three real estate investment trusts (REITs) are ideal stocks to buy and hold forever thanks to their exceptional dividend history, above-average yield, historical return, and/or growth opportunities. Here's a closer look at each company and why three Motley Fool contributors believe these three stocks are great buys today.
Realty Income has a long history of increased dividends
Liz Brumer-Smith (Realty Income): Just a quick glance at Realty Income and it's easy to see why this stock could be considered exceptional. This net lease REIT has one of the largest real estate portfolios in the industry, with interest or ownership in 11,700 properties. It also boasts an A credit rating, has maintained dividend increases for the last 25 years, and its dividend yield is nearly 3 times that of the S&P 500 average.
Realty Income rents its properties to wide a range of tenants across diverse industries on long-term net leases. These leases pass most of the financial responsibilities on to the tenants and run for seven- to 15-year periods with built-in annual rent increases to steadily grow the company's earnings. Its properties are primarily retail assets located across the United States, Spain, and the U.K. Around 14% of its annual rents come from non-retail properties like industrial real estate.
The REIT went on a massive shopping spree while interest rates were low. From 2020 through the third quarter of 2022, it spent nearly $14 billion on new acquisitions, adding over 5,000 properties to its portfolio. That is certainly an exceptional rate of growth. Even though interest rates are rising rapidly, the company is still flush with $2.5 billion in low-cost cash to help it keep growing. At the end of 2022, it completed a sale-leaseback agreement for a hotel and casino and is under contract to add 185 new retail properties to its portfolio in the first quarter of 2023.
Let's not forget about the stock's super-alluring 4% yield, which is well covered by its funds from operations (FFO). Realty Income pays its dividend monthly, and February 2023 will mark its 119th dividend increase over its 25-year tenure. Its impressive dividend track record and fast-paced growth right now makes it an ideal stock to buy and hold forever.
Hannon Armstrong Sustainable Infrastructure Capital is a different kind of REIT
Kristi Waterworth (Hannon Armstrong Sustainable Infrastructure Capital): Defining an "exceptional stock" can be difficult as there are lots of ways to categorize exceptionality. Is it a stock that has performed well? Is it a stock that is ethically sound? Is it a stock that might actually change the world a little bit? I tend to think it's a stock that does all three. As much as I try not to base every stock-buying decision on the ethics of the company involved, I do feel like there are enough stocks out there to choose from that I can afford to be selective and limit myself to investments that help me sleep better at night.
Among dividend stocks, an absolute all-star in environmental improvement is Hannon Armstrong Sustainable Infrastructure Capital. This under-the-radar REIT is different from most REITs in that it doesn't own a lot of the real estate it deals in. Instead, it frequently owns the debt that helps fund renewable energy and sustainable infrastructure projects. In that way, it behaves more like a mortgage REIT than, say, a residential housing REIT.
As municipalities and private industry increased interest in becoming greener, Hannon Armstrong Sustainable Infrastructure Capital got increasingly more profitable and able to offer larger dividends over time. Its first regular quarterly dividend was just $0.14 a share in November 2013, but that has grown to $0.375 a share in December 2022. That's a 167% increase in not quite a decade, and a dividend yield of 4.21%.
Dividends are great, but there are other signs that Hannon Armstrong Sustainable Infrastructure may be moving from a pretty great idea to a really big deal. Securities and Exchange Commission (SEC) filings from the end of December 2022 indicate that there are a lot of big players wanting more of this company on their books right now. Vanguard disclosed a 9.39% ownership of Hannon stock, The Wellington Group now owns an impressive 9.6% of shares, and BlackRock has picked up 7.9% ownership in Hannon Armstrong's shares.
Although doing what the others are doing doesn't always make sense as a stock-buying strategy, when funds are buying something hand over fist, it's a whole different story. This company has managed to keep performing (even in a difficult macroeconomic environment). Hannon Armstrong Sustainable Infrastructure has met or beat consensus earnings for four of the last five quarters, missing consensus for Q4 2022 by a mere 4 percentage points. Although lower than expected, Q4 2022 earnings results were identical to Q4 2021, and Hannon Armstrong continues to affirm prior guidance of annual growth of earnings to the tune of 10% to 13% through 2024.
For the good of the environment, I give it a thumbs up. For the performance and relatively low entry price, I give it a thumbs up. And for the continued and reliable dividend yield, I give it a thumbs up. I need more thumbs for this particular company.
Alexandria Real Estate Equities makes a science out of profitable office space
Marc Rapport (Alexandria Real Estate Equities): Office space has not exactly been the hottest of properties since the pandemic, but Alexandria Real Estate Equities is not like other companies operating in this sector. This office REIT develops, owns, and leases lab and other life sciences space in what it calls "innovation clusters" in key markets such as Boston, San Francisco, San Diego, Seattle, North Carolina's Research Triangle, and Washington, D.C.
This has been Alexandria's niche since its founding and it's long proved profitable for the company and for investors. Since its May 1997 initial public offering, Alexandria stock has nearly tripled the total return of the S&P 500 while consistently providing a higher dividend yield than the greater market (currently about 2.9% versus 1.6%).
This REIT's client list -- which contains a who's who of leading biopharma and other high-tech science outfits large and small -- also appears poised to continue providing that kind of payback. For instance, its occupancy rate of 94.8% doesn't appear to be a fluke or threatened, given that Alexandria just wrapped up a year in which its leasing volume was the second-highest in company history.
A rock-solid balance sheet that includes no debt maturities until 2025 and more than $5 billion in liquidity also should stand Alexandria in good stead as it continues to add to its inventory of high-dollar, highly specialized office space. And that should allow investors to trust this trust to continue building its record as a dividend machine that has recorded 12 straight years of increases, growing the payout by nearly 170% over that time.
All that, and the growing importance and staying power of life sciences in general and the pharmaceutical business specifically, make Alexandria Real Estate Equities a good candidate for a dividend stock to buy and hold forever.
