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The 3 Safest REITs to Buy Right Now

Feb 21, 2021 by Marc Rapport
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Back in the day, there were "widow and orphan" stocks, sold by brokers to their customers with confidence they would yield dividend income to feed the family and maybe even grow in price over time.

They often were utilities, considered about as safe as they come. Until they weren't. (Two good examples: Michigan's Consumers Power in the 1980s and South Carolina's SCANA in the past few years.)

Failed nuclear projects tanked both companies and their stock, and tens of thousands of their own employees, retirees, and others who counted on that income lost most of it, if not all. In SCANA's case, a couple of its top executives are likely headed to prison. So much for those widows and orphans.

There are still reliably yielding utilities to buy out there, of course, including Dominion Energy (NYSE: D), which picked up the pieces of SCANA in 2019, and Consumers Energy (NYSE: CMS), Consumers Power's successor.

But why stop there? Publicly held real estate investment trusts (REITs) can be a place to shop for safe investments, too. There are a couple hundred of them, and while they all share the mandate to pass through 90% of their taxable income to shareholders, they have to have some income to pass through, right?

So, let's choose three with the credentials to be considered "widow and orphan stocks" in today's self-serve stock market. A "safe" REIT in this sense would be one that has a long history of reliably paying dividends. And a good place to find those is among the Dividend Aristocrats, a list maintained by S&P Dow Jones Indices of those S&P 500 companies that have paid and increased their base dividends for 25 straight years.

There are three REITs among the 66 stocks on the 2020 Dividend Aristocrats list: Realty Income (NYSE: O), Essex Property Trust (NYSE: ESS), and Federal Realty Investment Trust (NYSE: FRT). Federal Realty has posted 52 straight years of dividend gains, followed by Realty Income at 27 and Essex Property Trust at 26 years.

Here's a bit more on each.

Realty Income

Realty Income has provided shareholders a compound average annual return (CAGR) of 15.3% since it was listed on the New York Stock Exchange in 1994. The dividend itself has a CAGR of 4.4% during that time and has been paid for 606 consecutive months and increased 93 times. The yield was 4.56% based on a Feb. 17 share price of $61.71. The San Diego-based company was founded in 1969 and touts itself as the largest publicly traded net lease REIT by equity market capitalization, supported by an investment-grade-rated balance sheet. Realty Income has more than 6,500 properties under long-term net lease with about 600 different tenants in 51 retail and other industries. Millionacres' Reuben Gregg Brewer explains here why Realty Income's stock may look relatively expensive right now. But for investors looking for predictable income more than growth, this is the definition of a safe REIT -- for February and any other month.

Federal Realty Investment Trust

Federal Realty Investment Trust is based in Rockville, Maryland, and owns more than 100 properties with about 2,900 tenants occupying 24 million square feet in Silicon Valley, Los Angeles, Chicago, Boston, New York, Philadelphia, Washington, D.C., and Miami. While primarily made up of retail, it also has about 2,800 residential units.

Federal Realty was founded in 1962 and concentrates on high-quality retail tenants anchored in or near affluent areas in its eight markets. As Millionacres' Reuben Gregg Brewer says in his analysis of this REIT, that and a solid balance sheet give its tenants and properties resiliency in a battered brick-and-mortar retail world.

Federal Realty kept up its Dividend Aristocrat status by paying out $4.22 in total dividends in 2020, up from $4.14 in 2019, $4.04 in 2018, and so on. It just declared a quarterly dividend of $1.06 payable April 15, which would put it on pace for another year of annual dividend increases if it does that every quarter this year.

Federal Realty was yielding a respectable 4.15% based on its Feb. 17 closing price of $102.22 per share, which had collapsed to $64.11 as the pandemic dug in but is still about 21% off its 52-week high of $129.19.

Essex Property Trust

Essex Property Trust is based in San Mateo, California, and went public in 1994 with a portfolio of 16 multifamily communities. Essex now has ownership in 246 communities comprising approximately 60,000 apartment homes and has another six properties in active development. The Essex portfolio is concentrated along the West Coast, including Southern California, the San Francisco Bay area, and metropolitan Seattle. It boasts a total shareholder return of 3,447% from its IPO through October 2020, compared with 1,097% for the S&P 500. Essex was yielding 3.12% as of its Feb. 17 closing price of $266.77 a share.

That's still about 19% off its 52-week high of $329.74, but the company did have to make rent concessions, contributing to a decline of 6.9% in funds from operations (FFO) from 2019 to 2020. And it may have to keep that up until its markets recover.

Still, net income finished up 30.5% for the year. And Essex kept up that strong dividend history, paying $2.078 per share in each quarter of 2020 after paying $1.95 per share in each quarter of 2019, and $1.86 through each quarter of 2018, and so on.

The Millionacres bottom line

Essex, Federal Realty, and Realty Income have long records of managing their portfolios and balance sheets through economic ups and downs.

Whether the pandemic will prove to be a convulsion like no other for retail and housing markets remains to be seen, but there's still plenty of reason for optimism to consider these three investments in real estate stocks to be reasonably safe harbors for investment income in a near-zero interest environment for the really safe stuff, like CDs and other insured savings accounts.

Even with no price growth, their consistent payouts still beat inflation. It's about the size and reliability of the dividend, not the yield and stock price so much, after all.

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Marc Rapport owns shares of Realty Income. The Motley Fool recommends Dominion Energy, Inc. The Motley Fool has a disclosure policy.