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retirees and finances

3 REITs Perfect for Retirees


[Updated: Dec 21, 2020] Dec 13, 2019 by Matt Frankel, CFP
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After you retire, your investment priorities undergo a major shift. Steady income and capital preservation are of paramount importance when you're no longer working and earning a paycheck.

However, that's not to say that you need to completely ignore growth potential. Some stocks have a great combination of steady income, downside protection, and room to grow over the long run. Three of my favorites are real estate investment trusts, or REITs, National Retail Properties (NYSE: NNN), Welltower (NYSE: WELL), and Public Storage (NYSE: PSA). Here's a bit about each company and why they could be a great fit for any retiree’s stock portfolio.

The right kind of retail

Before you run away at the mention of the word "retail," hear me out.

National Retail Properties is indeed a retail REIT, but it focuses on a specific type of property -- single-tenant, net-leased properties. The majority of the company's tenants are occupied by businesses that aren't susceptible to e-commerce disruption or even recessions. Just to name a few, convenience stores, restaurants, automotive service centers, and fitness centers are among the company's top property types.

The net lease element helps with stability as well. Tenants sign long-term lease agreements with guaranteed rent increases built right in, and they pay the variable costs of property taxes, insurance, and maintenance. All National Retail Properties has to do is get a high-quality tenant in place and enjoy decades of predictable income.

National Retail Properties yields about 3.7% and has increased its dividend for 30 consecutive years, making it an excellent fit for retirees who not only want income, but are concerned with their income stream rising faster than inflation. What's more, the combination of income and a smart investment strategy have generated 13.9% annualized total returns over the past quarter-century, handily beating the S&P 500.

The leader in a high-demand industry

Healthcare demand is rising and is likely to continue to do so for decades to come. As the massive baby boomer population ages, it should create a steady stream of demand for healthcare services.

One smart way for retirees to invest in healthcare is with Welltower, which is the largest REIT focused on healthcare properties. The company has a massive portfolio with about 1,300 senior housing communities (63% of rental income), and also has substantial holdings in outpatient medical systems, long-term care properties, and health system real estate.

The company has done a fantastic job of making value-adding acquisitions and opportunistically selling assets to maximize shareholder returns. In fact, since 2015 Welltower has purchased $16 billion of properties and has sold $10 billion worth.

Despite its massive size, Welltower could still have lots of room to grow. In addition to the development opportunities that will come with the growing senior citizen population, only about 11% of the current $420 billion outpatient medical facility market is REIT-owned, so the company's $16 billion of investments in recent years could be just a starting point.

Low costs and brand power

When it comes to lower-risk businesses, self-storage is near the top of the list. On one hand, self-storage is somewhat of a cyclical business, and occupancy can certainly drop during tough times. On the other hand, self-storage facilities are so inexpensive to build and maintain that they can still make money even in the worst of times. Public Storage is the dominant industry leader, and because of the inherent cost advantages combined with its scale, it estimates that it can break even with just 30% of its space rented. With occupancy of more than 94%, that's a pretty big margin of safety.

With nearly 2,500 owned storage facilities and interests in several other ventures, Public Storage is several times larger than any other competitor.

The company's low-cost, growth-focused business model has paid off well for investors over time. Over the past 30 years, Public Storage has produced a staggering 6,470% total return for investors. This means that a $10,000 investment in Public Storage in 1989 would be worth roughly $657,000 today. With a 3.8% dividend yield and a fantastic track record of growth, there's little for retirees to dislike about Public Storage.

Low-risk but not no-risk

As a final thought, it's important that while these three stocks have many qualities that retirees look for, that doesn't mean that they're without risk. These are still stocks, and as such, you should expect some degree of price fluctuations over time. These should be excellent income generators for retirees and over time should produce great total returns, but don't expect the path to those great returns to be straight upward.

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Matt Frankel owns shares of Public Storage. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.