Commercial real estate has been hit hard in recent years, as was painfully witnessed by investors in publicly traded real estate investment trusts (REITs). Many saw their holdings hammered first by the pandemic and then by rising interest rates.
These real estate dividend stocks need to borrow to grow because their obligation is to pass most of their taxable income on to shareholders as dividends. This makes it difficult for these pools of income-producing properties to retain the cash they need to buy more, well, income-producing properties. The period of high inflation and rising interest rates in 2022 and early 2023 was particularly hard on the industry
But as recession fears began to fade and the Federal Reserve has indicated it may cut rates this year, REITs have rallied even more than the overall market, as the chart below shows.
Despite that run-up, there are still good opportunities for nice gains in 2024. Here are three of my favorites.
1. AGNC Investment
AGNC Investment (AGNC 0.97%) is a mortgage REIT. That means it doesn't directly own real estate but instead invests in residential mortgage-backed securities pooled into bonds and sold by Fannie Mae, Freddie Mac, and other issuers.
Mortgage REITs typically provide much higher yields than equity REITs, and while such a high return might seem like risky yield-chasing, AGNC has paid in the 10% to 15% rate nearly every year since its initial public offering in May 2008, rising as high as 24% and dipping no lower than 8%.
And it's realistic to expect a bump in price this year, perhaps especially when the Fed makes the first of its possible interest rate cuts this year. After all, falling rates tend to boost bond prices. Analysts give AGNC a target price of $10.21, which would represent a 3% jump from its current level of about $9.90.
While AGNC is by no means a growth stock, as its total return in the chart below shows, it does pay monthly, making it a nice choice for passive income investors such as retirees.
2. Agree Realty
Like AGNC, Agree Realty (ADC -0.48%) pays monthly dividends, but its income comes from a completely different business. This retail REIT owns and operates a portfolio now numbering 2,135 properties in 49 states.
Walmart is Agree's leading tenant, accounting for 6.2% of the rent right now, but overall, it's a diversified roster, with no other retailer responsible for more than 5% of the rent roll.
Nearly 70% of the tenants are recession-resistant, investment-grade companies, with grocery and home improvement stores accounting for 9.7% and 8.6% of Agree's rental income, respectively, according to the company's January 2024 investor presentation.
Agree is also expanding, using its own investment-grade credit to finance what it expects to be $1.3 billion in acquisitions when 2023 totals are released soon. That includes 232 new properties in 37 states and 25 retail sectors in the first three quarters of the past year.
Analysts see an upside of about 4% in their average target price of $66.36 for Agree shares, which currently sell for about $64. That's a pretty modest gain, but given Agree's popularity among REIT investors, it wouldn't surprise me if its stock doesn't repeat or edge past its 52-week high of $75.71 if and when interest rates are cut.
Agree also yields a nice 4.7% after increasing its dividend by about 6% a year for the past decade, including six increases since it began paying monthly in January 2021.
3. Alexandria Real Estate Equities
Alexandria Real Estate Equities (ARE -0.90%) is a major owner of laboratory and research-related office space on what it calls collaborative campuses in and around San Diego, Silicon Valley, Seattle, North Carolina's Research Triangle, the District of Columbia, New York City, and Boston.
This trust's stock has endured a double whammy in recent years. After first rising sharply during the depths of the pandemic, Alexandria shares tanked when interest rates started ratcheting up and the office sector in general fell out of favor as the realization sank in that millions of people simply were staying home to work.
But this is a well-seasoned REIT, a pioneer in its niche that has a list of hundreds of clients anchored by major biopharma companies, universities, and government institutions whose employees can't easily do what they do by working remotely. The stock is still trading about 40% below its three-year high, pointing to a profitable opportunity ahead if this perception corrects.
Analysts give Alexandria a nod with an average target price of $143.11, a 12% upside from the $128 or so the stock was selling for in the first week of January. At that level, the yield is about 4% from a dividend that has been boosted for 14 straight years, including by about 5.4% a year over the past three.
A profitable 2024 could be just the beginning
The chart above shows how these three stocks have performed in total return in the past 15 years (AGNC went public in May 2008) compared with each other and with the greater market as benchmarked by the SPDR S&P 500 ETF Trust.
AGNC Total Return Level data by YCharts
Will that continue? Past performance doesn't guarantee that, but these REITs are positioned to maintain their momentum while taking advantage of falling rates to expand their portfolios and income, lending some confidence to investors seeking a profitable 2024 and beyond.
