Real estate investment trusts (REITs) are among the core options for income-based investing. I would go as far as arguing that REITs don’t even have to be located in tax-efficient accounts, as their dividend yields are so substantial that taxes don’t erode their compounding potential. Moreover, some REITs are positioned for solid capital gains after a significant drawdown since the turn of the year — providing illustrious total return prospects.
Although REITs generally provide solid income, the current market environment is plagued by interest rate uncertainty and credit risk. As such, I dialed in on the sub-sector to cherry-pick three best-in-class REITs that could bypass such risks and lead to secular success.
Let’s run through the three REITs for income that I identified.
Public Storage (PSA)
One of the primary reasons why I added Public Storage (NYSE:PSA) to the list is due to its diversification benefits. Public Storage, which owns and operates more than 2900 storage facilities across the United States, earns a differentiated revenue stream relative to most other REITs. Moreover, Public Storage REIT has cornered the storage market, meaning additional economies of scale are achievable.
Unfortunately for PSA’s investors, the vehicle has sustained a year-to-date drawdown of nearly 10%. However, the REIT revealed a spectacular Q3 earnings report in late October, which could act as a catalyst leading forward. PSA’s Q3 earnings showed the fund achieving $1.14 billion in quarterly revenue — a 5% bump year-over-year. Moreover, Public Storage’s management upgraded the REIT’s full-year guidance, stating that PSA’s funds from operations will likely reach an upper bound of $16.85 per share, which is five cents higher than its previous guidance.
Furthermore, Public Storage’s CapEx roadmap is well on track. The REIT rolled out an additional 500,000 feet of lettable space in its previous quarter, forming part of its ongoing 4.6 million square foot expansion plan. Continuous internal growth certainly adds to the possibility of increased residual value for shareholders.
With sound fundamentals and a dividend yield of 5.03%, it’s hard to argue against a bullish case for PSA.
Realty Income (O)
Realty Income (NYSE:O), otherwise known as the monthly dividend company, is a staple to most REIT investors. I must admit that O’s more than 20% year-to-date drawdown is somewhat justified. However, a buying opportunity has emerged as a consequence.
The company’s year-to-date slump primarily occurred due to systemic risk stemming from interest rate uncertainty and credit spreads. In addition, Realty Income recently agreed to an acquisition of Spirit Realty Capital (NYSE:SRC) that sent its stock into a tizzy as investors priced in a 15.4% acquisition premium.
Nevertheless, Realty Income’s fundamentals are in a good space. I particularly enjoy the fact that O’s funds from operations have grown at 5% per annum since 1996, leading to an annualized dividend growth of 4.4% since 1994. Moreover, the REIT’s high-quality single-tenanted retail portfolio is at 99% occupancy, suggesting its monthly dividend distribution policy is set to sustain for the foreseeable future.
Sure, factors such as waning consumer sentiment and resilient interest rates could influence O’s prospects. However, I think such risks will fade in time and the REIT is a good buy with a rewarding dividend yield of 6.48%.
Equinix is a non-core REIT that operates in the data center industry. EQIX (NASDAQ:EQIX) is more of a dividend growth opportunity than a short-term income play.
The REIT owns and operates approximately 250 data centers spread across 71 metros. By specializing in niche yet evolving concepts such as co-location and interconnection, Equinix has garnered a 10-year compound annual growth rate of 13.59%. On top of that, Equinix shows no signs of slowing down, as it has 56 development projects underway in 23 countries to base highly scalable data centers in noteworthy metros.
Furthermore, Equinix is showing signs of short-term momentum. For example, EQIX’s Q3 earnings report revealed $2.06 billion in quarterly revenue, a 12% year-over-year increase. In addition, Equinix achieved $5.97 in funds from operations during the quarter, beating its estimates by 58 cents. In turn, the REIT’s management decided to bolster Equinix’s dividend payout by 25%, leading to a forward dividend yield of 2.33%.
Many might be concerned by Equinix’s P/FFO of 34.2x. However, considering the fund’s underlying assets are in hyper-growth mode, that justifies high price multiples.
It’s all systems go for EQIX!
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.