Finding A Good REIT For Today's Market

Editor’s Note: Our experts here at cover a lot of investing topics and great stocks every week. To help you make sense of it all, every Wednesday we’re going to pick one of those stocks and use Magnifi Personal to compare it with its peers or competitors. Here we go…

Real estate investment trusts, or REITs, have existed here in the U.S. since the 1960s. The mature American market means there are some interesting subsectors where investors can gain exposure.

One such asset class is infrastructure. American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) are the second-, fourth- and 11th-largest U.S. REITs. All three own communication towers across the country, which are leased out to mobile phone services providers, radio and TV broadcasters, government bodies, and other companies.

The other type of infrastructure popular in the REIT space is data centers. The third- and 10th-largest REITs, Equinix (EQIX) and Digital Realty (DLR), both own and lease data centers to technology companies requiring immense amounts of digital storage space.

However, the data center REITs have come under criticism. In 2022, well-known short seller Jim Chanos said he was raising money to bet against such companies, predicting that the tech giants currently renting the space would look to develop their own data centers going forward.

As Chanos put it, “…although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.”

Chanos also pointed to a wider issue in the REIT space: the risk that many are overvalued.

According to numbers compiled by FactSet, the average S&P 1500 REIT is priced at 2.39 times net asset value (NAV) and 40.2 times earnings. Also, the average S&P 1500 REIT’s net debt is 1.36 times its NAV.

However, the high multiples on REIT shares come from the fact that they have lots of exposure to high-growth sub-sectors, such as self-storage, healthcare, student accommodation, and the aforementioned infrastructure.

What we want to do this week is to compare a REIT in the sub-sector that Chanos doesn’t like — Digital Realty — and the largest of the communications tower REITs, American Tower.

The easiest way to do that is to ask Magnifi Personal to do it for us. It’s as simple as asking this investing AI to “Compare AMT to DLR.” Continue reading "Finding A Good REIT For Today's Market"

Growing Dividends is the Secret to Wealth

For the dividend-focused investor, nothing is better than one of your stocks announcing a dividend increase. So you can be assured that this Seeking Alpha headline caught my eye: 100 REIT Dividend Hikes.

Investing for dividend growth is a sure-fire way to build your wealth over the long term. The article explained that 100 real estate investment trusts (REITs) had increased their dividend rates so far in 2022. Last year there were 120 rate increases in the REIT sector.

This many increases bodes very well for one of my favorite investment strategies…

REITs own commercial properties or invest in real estate-related debt securities. The Nareit includes 213 publicly-traded REITs in its All REITs Index. These companies operate as pass-through businesses, which means they don’t pay corporate income taxes as long as they pay out at least 90% of net income as dividends to investors. The REIT dividend rules make the sector a good place to look for attractive dividend-paying stocks.

A few years ago, I researched the returns from growing dividend stocks. I found that investors earn an average annual compound total return that, over the long term, will be very close to the average dividend yield plus the average dividend growth rate.

For example, if an REIT (or shares of any stock with growing dividends) has an average yield of 4% and the dividends grew by an average of 10%, investors in that stock will have seen a 14% compound annual total return.

While the shorter-term market cycles will pull returns above and below the expected results, owning a dividend growth stock for ten years or more will push the returns very close to mathematical expectations.

When researching dividend growth stocks, look first at the historical dividend growth rate. You want to see the average growth rate and how many years the company has been increasing its dividend. For example, industrial property REIT Prologis, Inc. (PLD) has increased its dividend for eight consecutive years with an average of 10.5% dividend growth. Add in the current 2.5% yield, and you have a low-teens return potential. Continue reading "Growing Dividends is the Secret to Wealth"

What's a "YieldCo"? (Hint: It's Green)

Adam Feik - Contributor - Energies

Quick: Name as many energy stocks as you can that fit these criteria:

  • Better than 12% annualized total returns over the past 5 years
  • Positive returns over the last 12 months
  • Greater than 3% dividend yield
  • Currently trading 5% or more below its own 52-week high

There aren't very many. A handful of NYSE-listed pipeline companies make the cut, including these: Continue reading "What's a "YieldCo"? (Hint: It's Green)"