Top 5 REIT Stocks that will Never Let You Down

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Is this the perfect time to invest in REIT stocks? Learn how to find the right REIT stocks to include in your portfolio and why I personally love investing in real estate.

Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and a subject always near and dear to my heart, REIT stocks and investing.

I got my start as a real estate analyst…oh so many years ago, I’ve owned my own rental properties and no other asset class has created as much family wealth. And the best part is, with REIT stocks, you don’t need a lot of money to start and you don’t have the hassle of managing your own properties.

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reit stocks to buy - investment performance by property sector and subsector

But there are more than 335 real estate investment trusts trading on the U.S. exchanges alone. Beyond that, there are 12 different property types with widely different fundamentals and outlooks. These are year-to-date returns through the first five months and you see REITs have done really well with an 18% return versus the stocks in the S&P 500 that are up 7% in that period.

But if you look at returns last year, you had some REIT stocks like Industrial and Data Centers returning twelve- and 21% but also some real dogs like retail losing 25% and office down 18%.

How to Find the Right REIT Stocks to Buy

So in this video, I want to show you how to find REIT stocks to buy and how to build a portfolio of different property types, a portfolio that would make any real estate mogul jealous. I’ll then reveal the top five REIT stocks to watch in four different segments.

I’ll be starting with the Reliable REITs collection of stocks on, it’s a filtered group of REITs with higher dividend yields, free cash flow and growth we can use to narrow our list before researching down to the top five. I’ll leave a link to stockcard in the video description to check that out.

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Top 5 REIT Stocks to Include in Your Portfolio

Our first REIT stock is in probably my favorite property type right now, $1.2 billion medical facilities REIT Community Healthcare Trust, ticker CHCT.

The REIT owns 147 properties in 33 states with 182 tenants across the healthcare space, and you can see it’s got good diversification across facility types from medical office to clinics and specialty. As of last quarter, occupancy is at 89.1% which is a little low but I’d expect that to increase here this year.

And those of you in the nation know, healthcare facilities is a theme I’ve been watching since late last year. During the pandemic, all medical providers had to triage their services, basically cut everything that wasn’t essential so they could help COVID patients. Well that meant cutting all the elective procedures and visits that are often the highest profit margin for the industry.

The idea here is that as these services start coming back, that’s going to be a boom in revenue and profitability, first for the healthcare companies and then for the companies like Community Healthcare Trust that own the properties.

And we’re starting to see that now. The Wall Street Journal is out with a piece last week highlighting the trend and some of the companies in the space. For example, HCA Healthcare is up 25% and Tenet Healthcare is up 72% just in the first six months of this year.

Shares of Community Healthcare pay a 3.6% dividend and the company has increased it every quarter since the IPO in 2015. Funds from operations, that FFO number, grew by 23% in the first quarter and are $45 million over the last year. That puts it at about $1.92 per share so the company is paying out roughly 90% of its FFO to cover the dividend. That’s a little high but nothing to be worried about especially with that kind of FFO growth.

Analysts have an average target of $54.11 per share which is 13.2% above the current price. Add in the dividend and you’re looking at a 16.8% expected total return over the next year and a great long-term stock.

We’ve still got four more REIT stocks to highlight but I wanted to share the criteria in that reliable REITs screener to give you an idea of how I started the search.

The screener starts by filtering REITs for a dividend yield above 1% which most real estate stocks are going to satisfy that. REITs get a special tax break if they distribute at least 90% of income as dividends to investors so most pay a very strong yield.

It also screens for stocks with positive cash flow which is important for any investment but especially for REITs where that cash flow is critical to keeping up the dividend.

Finally here, it also filtered for stocks with a positive dividend per share growth rate, so growing that dividend payment which is actually a pretty high bar considering a lot of companies were forced to cut or pause their payments last year.

Beyond that initial list of REIT stocks, I wanted to make sure I found stocks in different property segments to give the portfolio more diversification. I looked at funds from operations and the coverage of the dividend on that as well.

I wanted to include a data center stock in the list with CoreSite Realty, ticker COR, and its 4.6 million square feet across 25 data centers in eight U.S. markets.

CoreSite is relatively small even with over 1,300 customers so I think you get a lot of growth potential not only in that data center segment, which is one of the fastest growing property segments, but also on the company growing into its industry.

Shares pay a 3.9% yield with 11% annualized dividend growth over the last four years. Management has guided to FFO of $5.50 a share which means the company is paying out 92% off funds from operations to cover the dividend. That’s kind of high so it’s hard to imagine you see much more than 10% annual dividend growth but that’s still very strong.

The average analyst target of $130 a share is right where the stock is trading but the shares have produced a 13.5% annualized total return over the past five years and again this is a very strong growth market so maybe watch for a pullback in the shares but I think long-term investors can like it here as well.

Next is another REIT stock in the healthcare space, one of my favorites, Medical Properties Trust, ticker MPW.

MPW owns more than 390 hospitals, long-term care facilities and other medical assets in nine countries. At $17 billion in assets, it’s the 2nd largest owner of hospital beds in the U.S. with 67% of revenue from the states, 26% from Europe and 5% from Australia. And this is a very well diversified portfolio of assets you see here in the chart on the left by asset type, maybe a little heavy in general acute care at 80% of assets but very little of the senior-care facilities that have hurt the medical REITs over the past several years.

I love the business model for this company. It uses a sale-leaseback strategy for acquisitions, which means it buys medical properties from the healthcare companies and then leases the property back to them. Servicers like this because it frees them up to focus on healthcare and MPW can focus on the real estate. So this is decades of potential growth as the company takes advantage of ultra-low interest rates to consolidate all the medical properties out there. This is a chart of the gross of the assets growth and what you want to see with a REIT, constantly growing that asset base of properties for scale and diversification and MPW has done a solid job here growing its assets by 30% annualized over the last decade!

The company puts leases on a triple-net model which means the tenant bears all property costs. These are long-term leases up to 20 years and 97% of them have inflation-based rent escalators.

Basically, with interest rates where they are, the company can borrow at next to nothing, buy a property and immediately lease it for 20 years with no property-related expenses…and just swim in that free cash flow!

Medical Properties Trust announced its eighth consecutive year of higher dividends. The annual dividend of $580 million is just 80% of funds from operations and we’ve already seen how this cash flow is super-stable.

The balance sheet is fairly clean here with no debt maturities next year and total debt is spread out other than the $3 billion to refinance in 2024 and 2025. I’d expect management to be looking to take advantage of rates right now and refinance a lot of this further out which would free up a LOT of cash flow!

On the valuation side, at a price of 14.5-times that FFO multiple, it comes in under the average 18-times multiple though right around the average for medical properties. Analysts have an average target of $20.27 per share over the next year but I think it can get back to that high around $24 each for a 17% return plus the dividend yield.

This next real estate stock is a popular one, cell tower leader American Tower Corporation, ticker AMT.

AMT is easily the leader in the space with over 187,000 sites in nearly every corner of the world. It owns the tower structure and land then leases out usage of the antenna and other equipment to tenants, usually cell carriers.

And you might think the cell tower business should be slowing down after decades but the company is seeing new growth not only geographically but in new business as well.

Connected devices are expected to grow 18% annually in the U.S. alone as the Internet of Things theme ramp up and data growth internationally is even faster. The company booked 15% annual growth in its adjusted FFO, the graph on the lower-left here, and I think it keeps that pace up on the IoT theme, data demands from streaming and even legacy mobile demand growth in emerging markets.

That strong growth has enabled AMT to increase its dividend by 18% annually over the last five years, really an amazing payout growth you just don’t see from other REIT stocks. Adjusted FFO of $8.35 per share means it’s only paying out 60% of that to cover the dividend so should have no problem growing the company and the payout into the future.

The average analyst price target of $278 per share is about 5% from the current price but I think that dividend growth rate and the potential for more keeps the shares going beyond that.

Everyone in the Bow Tie Nation is going to recognize this next REIT, STAG Industrial, ticker STAG.

STAG is another of my favorites. The company owns 450 buildings in 38 states and 91 million rentable square feet in that industrial, warehouse property type.

The rise of ecommerce and online shopping has destroyed the retail property market, especially last year, but all those online orders need to be stored somewhere and that’s meant a boom in warehouse demand. In fact, 43% of the STAG’s property portfolio is involved in ecommerce activity.

No tenant accounts for more than 2% of the company’s total rent revenue, so the odds of a tenant failure vacating lots of space is zero. Shares trade for just 18-times funds from operations which is slightly lower than the industry average but not quite the value play it was last year.

Stag pays a 3.8% dividend yield and even better, that’s on a monthly basis so you know you’re getting that dividend check every month. The dividend has only increased at about 0.8% a year over the past five years so not huge growth but the stock has produced a 14% annual total return so a strong price return as well as yield. Shares are trading for about 18.4-times FFO, about half the 30-times multiple for industrial properties so a good value as well.

Now the average analyst target price of $38 a share is right at the current price but it’s tough arguing with the long-term return and I think this is a property type that’s going to keep rewarding investors for a long time.

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