Real estate investment trusts (REITs) have long been a favored investment option for that portion of your portfolio focused on consistent income and long-term capital appreciation. They own pools of income-generating properties in a wide range of industries, and there are more than 200 publicly traded REITs.
While their holdings and business models are diverse, they all share this attribute: the requirement to pay at least 90% of their taxable income as dividends to shareholders each year. Although they're typically resilient, many REITs have struggled lately because of high interest rates that make financing their own operations more expensive and hurt many of their tenants.
That means there are bargains to be had in the REIT sector, and three to consider are American Tower (AMT 1.12%), Federal Realty Trust (FRT 0.87%), and Realty Income (O 0.09%). The chart below uses the Vanguard S&P 500 EFT to show how this trio has lagged the broader market in the past year in terms of share price.
Now, here's a second chart that takes a much longer view of these stocks' performance as income-generating investments, comparing their dividend yields over the past decade.
Data source: YCharts FRT Dividend Yield
Here's a closer look at why each of these is, in its own way, a compelling buy this month.
1. American Tower
American Tower is one of the world's largest REITs and providers of wireless communication infrastructure. The major mobile carriers lead the list of thousands of customers worldwide that depend on the company's 225,000 cell towers and transmitters (and more recently, data centers) to stay connected in an increasingly digital world.
With the explosion of 5G networks and now artificial intelligence, American Tower's ability to generate recurring revenue from long-term leases of its must-have facilities should help this infrastructure REIT continue a record of outperformance that has seen it more than double the total return of the S&P 500 since it went public in 1994. It's also raised its dividend, which now yields about 3.4%, for a dozen straight years.
2. Federal Realty Trust
Federal Realty Trust is much smaller than American Tower but it is, nonetheless, REIT royalty. Fifty-five straight years of payout increases places this owner of high-end, mixed-use, retail-anchored properties on the list of Dividend Kings, the only REIT in that exclusive club.
Federal Realty's focus is tight. Its 105 properties are in only nine markets: Southern California, Silicon Valley, Phoenix, Chicago, Boston, New York, Philadelphia, Miami, and Washington, D.C. That kind of market concentration may not be ideal, but these are blended-use properties in affluent areas that have enjoyed notable stability through the pandemic and now beyond.
These locations' occupancy rates remain high and their rent has been paid as Federal Realty continues to build on its record as one of the oldest publicly traded REITs and one of the most respected. It's not flashy, but an enticing yield of about 4.9% make it a reliable provider of passive income. and there's little reason for shareholders to fear that will change.
3. Realty Income
Like its much smaller retail REIT peer, Realty Income has an impressive long-term record of its own: paying dividends every month for 634 straight months and raising the payout for 30 straight years.
Self-branded as "The Monthly Dividend Company," Realty Income is the fourth-largest REIT on the planet. It has expanded its portfolio to more than 12,200 properties across the U.S., the U.K., Spain, and most recently, Italy.
And like American Tower, Realty Income has built a total return record that holds up against many a go-go growth stock, roughly tripling the S&P 500's result since this REIT's public market debut in 1994. Much of that return can be attributed to its dividend, which now yields a healthy 5.2%. The company's history of consistent dividends, high-quality tenant base, diversifying portfolio (it has expanded into casinos and even vertical farming), and seasoned management points to continuing strong performance.
Favorable prices for stocks you can trust
Analysts consider each of these trusts "moderate buys" and give them average target prices of 21% to 35% above their recent trading prices. That seems reasonable to me, and I own two of them and plan to add the third soon.
Another measure of their solidity is their dividend payout ratios. Based on cash flow, they range from 51% for Federal Realty Trust to 76% for Realty Income, highlighting the ability of each of these companies to cover their dividend obligations from cash generated from operations.
American Tower, Realty Income, and Federal Realty Trust are three trusts that hold strong positions in their respective specialties and are priced attractively for buy-and-hold investors interested in a reliable flow of dividend payouts and good prospects for share-price growth over time.
