Many of the best stocks to own are the ones other investors consider boring. At the top of this list are real estate investment trusts, or REITs, which are about as boring as it gets but can nevertheless make investors rich over the long run. Here are three of the best in the business and a little about each one.
1. Americans aren't getting any younger
It's no secret that the U.S. population is aging, and the need for health care is increasing. Instead of investing in this trend through a pharmaceutical or other health care stock, a relatively safe and lucrative alternative is a company that builds and manages health care facilities, such as HCP (NYSE:HCP).
HCP is one of the largest health care REITs, with nearly 1,200 properties. The majority of the properties (68%) are senior housing or post-acute care, and the current demographics are favorable for future growth in both property types.
In addition to buying properties, HCP develops new health care properties and invests in the debt offerings of other companies. Its investment-grade credit rating grants it access to low-cost funding for any project it decides to undertake, so investors enjoy several different kinds of growth (rent increases, development, debt spreads, etc.).
This approach seems to be working. Since going public in 1985, the company has produced a 15.5% average annual return and has increased its dividend for 29 consecutive years. This is a fantastic performance, especially sustained over such a long period of time, and if HPC continues to perform at this level, it could create serious wealth in your portfolio over the coming decades.
2. Profit from our "nation of renters"
Young Americans are buying fewer homes than previous generations. This trend is due to a combination of factors, such as younger Americans' tendency to move around often, the difficulty of getting an affordable mortgage, and a general distrust of the housing market since the mortgage crisis.
As a result, rent has been increasing rapidly, and demand for new apartments continues to rise. Sure, you could buy an investment property or two, but an easier way to profit from this trend is with an apartment REIT such as AvalonBay (NYSE:AVB).
AvalonBay currently owns and operates 277 apartment communities with about 82,500 rentable units, and most are located in the company's 18 "core" metropolitan markets. There are another 26 communities under construction, and the company's main strategy is to grow through development and become the market leader in "high barrier to entry" markets such as Boston, New York City, and San Francisco.
The combination of development-driven value creation and rising rental rates has produced a strong 16.2% average total return over the past 20 years, as well as sector-leading dividend growth averaging 5.3% per year during that time.
There is tremendous reward potential in apartments, and as we saw during the recent crash, demand in desirable metropolitan locations, like AvalonBay, tends to stay strong, even when the economy goes bad.
3. Americans sure have a lot of stuff
With more than 2,200 locations, Public Storage (NYSE:PSA) is the world's largest owner-operator of self-storage facilities, and with more than 1 million customers, it's one of the largest landlords in the world of any kind.
The self-storage industry is great for long-term investors, because it tends to thrive during recessions as well as strong economies. As one industry expert recently explained, when times get tough, people downsize and need a place to put their stuff, but when times are good, people buy more stuff and need a place to store it. Either way, self-storage facility operators win.
Self-storage has been the fastest growing segment of commercial real estate, and it's estimated that 50% of Americans have used a self-storage facility during their lifetimes. Storage facilities are relatively easy to operate, too. The buildings are low-maintenance (no running water to units, for example), and the eviction process is straightforward compared with other forms of real estate.
Over the past 10 years, Public Storage has produced an average total annual return of 15.4% and has more than doubled its dividend during that time period.
The reward potential justifies the risk
No investment is without risk, especially those with the potential to produce these kinds of gains. For example, REITs can be vulnerable to sudden increases in interest rates as many rely on borrowed money to grow. And because most REITs specialize in a certain type of property, they can be vulnerable if that particular type of property faces headwinds (if apartment vacancies spike, for instance).
The bottom line is that while the past performance of an investment doesn't necessarily predict its future performance, I believe that the reward potential offered by REITs more than justifies the risks you take on.
Just a starting point
This is just a sampling of the many REITs that could produce market-beating returns, as well as a growing income stream in your portfolio. REITs like these make great investments for any kind of investor -- from 20-year-old adventurous growth-seekers to 80-year-old retirees who rely on their investments for income, and anyone in between. I highly recommend that all investors consider keeping a substantial portion of their portfolio invested in high-quality REITs like these. In a few decades, you could be glad you did.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.