Real estate investment trusts (REITs) are designed to pass income on to shareholders and, thus, compete with other income options. Rising interest rates have made things like CDs more attractive, which makes REITs less desirable to some investors.
There has been a broad drawdown in the REIT sector, but that's really opening up an opportunity for long-term dividend investors to buy some of the biggest and the best REITs at increasingly attractive yields. Here are three you might want to consider today: Realty Income (O -0.17%), Prologis (PLD 0.69%), and AvalonBay Communities (AVB 0.07%).
1. Reliable dividends are in Realty Income's DNA
Realty Income has trademarked the nickname "The Monthly Dividend Company." That speaks to the REIT's monthly pay dividend, but also to its commitment to paying a reliable and slowly growing dividend. To put some numbers on that, the dividend has been increased annually for 29 consecutive years, with a roughly 4.4% dividend growth rate over that span. The stock is down 16% over the past year, and that has pushed the yield up to roughly 5.5%.
Realty Income owns over 13,000 properties and has a market cap of nearly $40 billion. It is by far the largest net lease REIT, which means that it owns single-tenant properties for which its tenants are responsible for most property-level costs. It has an investment-grade-rated balance sheet. Although it mostly owns retail properties (about 75% of rents), it has a modest amount of exposure to industrial assets and some niche real estate, like vineyards and casinos.
The REIT's size and financial strength generally provide it with advantaged access to capital markets, so it can take on deals that many of its peers wouldn't be able to consider. This REIT isn't going to excite you, but it should continue to provide an attractive income stream for years to come.
2. Prologis is where its customers need it to be
Like Realty Income, Prologis is a REIT giant, with a market cap of $115 billion and 1.2 billion square feet of warehouse space spread across four continents. It has an investment-grade-rated balance sheet. On top of that, management estimates that it has around $38 billion worth of investment opportunity in the form of vacant land in its portfolio that it can capitalize on when it sees an opportunity to expand.
Prologis' dividend track record isn't quite as good as Realty Income's, with the warehouse giant having just about a decade of annual increases under its belt. However, it isn't the same company it was 10 years ago -- it is larger and stronger today. Moreover, it basically owns highly attractive warehouses in the most important global distribution hubs. So it is located where its customers want to be located.
The stock is about flat over the past year but is down roughly 27% from its 2022 high-water mark. While the dividend yield is modest at around 2.7%, that's toward the high end of the range over the past decade, suggesting that now is a good time for a deep dive.
3. AvalonBay knows how to switch gears
AvalonBay's dividend hasn't been increased annually for any notable length of time, but it has trended higher for decades. The yield today is around 3.6%, which is on the high side of the yield range over the past decade. The stock is down around 10% over the past year. The company is one of the largest apartment landlords and is highly respected.
Where AvalonBay really shines is its ability to weather industry ups and downs. The way it does this is by switching gears to best capitalize on the opportunity set it faces. For example, when asset prices are lofty, it will often sell properties from its portfolio and use the proceeds to build new assets. When apartments are trading hands cheaply, it will shift to buying properties (often newer construction). The end goal is to adjust in such a way that it maximizes profitability for shareholders. So far, management has proven to be particularly adept at this.
Focus on the industry leaders
Although Realty Income, Prologis, and AvalonBay focus on different property types, they all have one thing in common -- they are industry leaders in the property niches they serve. With the broader REIT sector heading lower, now is the time to focus on owning the best companies, and all three of these REITs fit that bill.
Realty Income will likely be the most attractive for yield-focused investors, but if you like to own good companies when they are unloved on Wall Street, Prologis and AvalonBay are worth examining, too.
