Real estate is a fantastic asset class.
But not all real estate is equal after the COVID-19 pandemic.
Do you really want to own an office tower right now? Sure, some office towers will be fine. But as a growth asset class, you’re looking at potential high vacancies for years.
Shopping malls are the same story. Do you ever want to buy a shopping mall again, considering that Amazon.com exists?
Not all real estate is equal, but that’s why real estate investment trusts (REITs) are fun.
REITS offer so much specialization. I’ve been exploring growth-oriented REITs lately. These stocks may not come with the highest yield, but they’re in segments of the market that are growing at a rapid pace.
And dividend growth is what we want with inflation running this hot.
Let’s check out a few growth REITs that should thrive as the world settles into its post-COVID routine in this week’s Investing With Charles.
Here are the highlights from my conversation with Research Analyst Matt Clark.
REITs are publicly-traded real estate.
You and I can go buy a house. We can’t go buy a multimillion-dollar, 50-story skyscraper. That’s not realistic for an ordinary investor.
REITs give you access to an institutional portfolio of real estate assets, but you get it in the convenience of a stock that you can buy and sell just like any other stock. You can put it in your brokerage account, your IRA, whatever.
If you’re an income investor, it’s hard not to own REITs at least as part of your portfolio. They tend to be one of the highest yielding sectors in the market — in part because real estate is income focused.
REITs also have special tax provisions. The government incentivized REITs with a rather large tax break. As long as a REIT distributes 90% of its net income to investors, it won’t pay federal taxes.
When you’re not paying taxes, it’s kind of a virtuous cycle. These REITs have more cash available to pay out as dividends.
Let’s look at a few options in lasting market mega trends.
Growth REIT No. 1: Capitalize on E-Commerce With PLD
Charles: Amazon is destroying retail. It’s been destroying retail for 20 years and it will continue to do so for another 20 years. There’s a lot of retail left to be ruined.
But rather than identify that as a problem, identify it as an opportunity to buy one of Amazon’s landlords, Prologis Inc. (NYSE: PLD).
Prologis is a leading REIT in industrial real estate. It owns distribution centers, warehouses and properties like that. It’s that gritty, boring real estate you don’t want in your backyard because you don’t like trucks coming and going in the middle of the night. But it’s a very attractive stock to have in your portfolio.
Matt: Right now, just looking at a 12-month chart, PLD is up about 109% over the last 12 months.
PLD Has Momentum
It’s still slightly below its 50-day moving average after a nice spike up at the beginning of the year.
This is what you might call a “last mile REIT.” E-commerce retailers like Amazon want to increase their efficiency in the last steps of delivery — that last mile from the warehouse to your doorstep.
Charles: I marvel at Amazon. It’s amazing. You just pick up your phone and in 30 seconds you’ve ordered something that’s arriving at your house before the end of the day. It’s an amazing, elegant system.
The logistics involved with getting whatever $5 electric toothbrush you ordered to your doorstep are impressive. There is this entire ecosystem that makes it happen. And Prologis is one of the stocks in that chain. It’s part of that ecosystem.
If you want access to one of the most obvious and durable trends of the next 20 years — the continued dominance of e-commerce — PLD is a nice way to play that and get paid dividends along the way.
2 Growth REITs for Everything Amazon Doesn’t Cover (O & STOR)
Matt: You talk about how you can be specialized when looking at REITs. One growth market you’ve mentioned before involves basic necessities. Talk about that a little bit.
Charles: Yeah, sure. I haven’t gone to a mall in years. But if I need that electric toothbrush or whatever, I’d go to the local pharmacy before I would order on Amazon.
It’s more convenient to shop in person for certain items at places like pharmacies or convenience stores. REITs that specialize in those high traffic retailers are incredibly attractive.
One of my favorites is Realty Income Corp. (NYSE: O). It’s a stock that you can just buy, not look at for 20 years, and just let the dividends accumulate.
It pays monthly dividends, which is fantastic because those dividends compound faster. And Realty Income raises its dividend almost every quarter and has for as many years as I can count.
It’s a rock-solid performer. It’s not even low drama … it’s a no drama stock.
Along the same lines is STORE Capital Corp. (NYSE: STOR).
STORE Capital focuses on smaller, high-traffic tenants. It has more of a services focus, though.
You can’t order a dentist or veterinarian on Amazon. So this REIT excels by owning properties that people have to go to.
Matt: Realty Income is down a bit over the last 12 months, but it has fought its way back.
Realty Income Is Climbing
STOR has struggled a bit as well, but it’s starting to mount itself back in terms of its stock price.
STOR Is Giving Back Some Recent Gains
Data Centers Are Everywhere — Capitalize With DLR
Matt: I want to switch gears over to one of my favorite avenues: data centers.
Charles: Five years from now, are you going to be using more data on your phone or less? The obvious answer is more.
I don’t know of any human being that uses less data today than they did five years ago or that doesn’t expect to be using more data in five years than they are now. Netflix, Amazon Prime Video , Disney+ and all the other streaming platforms are proof.
All of these apps require data centers. Amazon, your bank and even the U.S. government need data centers to function. Almost everything that you can imagine requires a data center now.
For redundancy, security companies like to spread these data centers around. They like to use different providers. Some companies build their own data centers, while others use a third party, like the REIT I want to highlight, Digital Realty Trust Inc. (NYSE: DLR).
If you want to talk about a safe trend, it’s the rise of data centers. And I think DLR is an excellent growth REIT to play that trend.
Matt: I was the editor of a newspaper that had a Facebook data center in its backyard. It was impressive to say the least — a zero carbon footprint data center that spanned acres.
Charles: It looks like something from science fiction on the inside. You go inside, and it’s just wall-to-wall computers. And they have to keep the temperature low so that the computers don’t overheat. It really does look like something from a movie.
Matt: Yeah, it’s just wall-to-wall servers because we are talking about massive amounts of data. And you’re absolutely right. Everyone has to store data somewhere.
Charles: Every picture you take on your iPhone is in a data center somewhere.
Matt: Digital Realty, our REIT for this trend, finds properties with the essentials that data centers need. We’re talking about solid electricity and access to water because that is what data centers need in order to operate.
Over the last 12 months, you’ll see kind of a common pattern in REITs where we had a run-up followed by a drop, and now we’re seeing these REITs starting to come back now.
DLR is up 5% over the last 12 months.
Digital Realty Felt the 2022 Sell-Off
The last growth REIT we discussed was American Homes 4 Rent (NYSE: AMH). Click here to read more about this stock in my latest Dividend of the Week piece.
Where to Find Us
Coming up this week, Matt will have more on The Bull & The Bear podcast, so stay tuned. Don’t forget to check out our Ask Adam Anything video series, where Chief Investment Strategist Adam O’Dell answers your questions.
You can also catch Matt every week on his Marijuana Market Update. If you are into cannabis investing, you don’t want to miss Matt’s weekly insights.
Remember, you can email my team and me at Feedback@MoneyandMarkets.com — or leave a comment on YouTube. We love to hear from you! We may even feature your question or comment in a future edition of Investing With Charles.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.