This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Real Estate Investment Trusts, otherwise known as REITs, were among the hardest-hit stocks over the course of 2020. The coronavirus pandemic resulted in widespread store closures. REITs had already been struggling coming into 2020 due to the explosive growth of e-commerce, resulting in weak traffic for physical stores, particularly for REITs with heavy exposure to malls.
But things are looking up for Real Estate Investment Trusts, and the broader economy. The end of the coronavirus pandemic is on the horizon. Many REITs are poised to return to growth in 2021 and beyond.
In the meantime, these 3 high-quality REITs reward their shareholders with high dividend yields, and consistent dividend growth. These should be considered quality buys for income investors.
REIT for 2021: Realty Income (O)
Realty Income is arguably the safest REIT of all, because of the company’s long-term commitment to paying and raising its dividend consistently over the years. The company has paid 605 consecutive monthly dividends in its 51-year operating history. It has also increased its monthly dividend 109 times. It is on the exclusive list of Dividend Aristocrats, a group of just 65 stocks in the S&P 500 Index that have increased their dividends for at least 25 years.
Realty Income focuses on retail properties. It has a diverse property portfolio consisting of more than 6,500 properties. Its portfolio includes a number of very well-known businesses as tenants including Walgreens, 7-Eleven, Dollar General, FedEx, Walmart, and more. Its properties are leased to more than 600 different tenants in 50 industries. It owns predominantly standalone properties under the triple net-lease structure, meaning tenants are responsible for the three major expenses—maintenance, insurance, and taxes.
Despite operating in the difficult retail environment, Realty Income continues to post solid results, indicating the strength of its management team. In the 2020 third quarter, AFFO per share fell just 2.4% to $0.81 year-over-year. Realty Income collected 93.1% of contractual rent in the third quarter.
The coronavirus pandemic weighed on Realty Income in 2020, but assuming a return to normal life in 2021, the company should quickly return to growth. Realty Income has generated very steady growth for many years. Adjusted FFO-per-share grew by 6% annually between 2009 and 2019, which is a very solid result for a REIT, as these are generally not high-growth stocks.
Realty Income generates its growth through growing rents at existing locations, via contracted rent increases or by leasing properties to new tenants at higher rates, but also by acquiring new properties. Management invested about $3.7 billion in new properties during 2019. Realty Income expects to increase its investments in international markets during the next couple of years.
In December, Realty Income raised its dividend by 0.2%, bringing the total dividend growth rate to ~3% for 2020. Shares currently yield 4.6%, making Realty Income a highly appealing stock for income investors, as interest rates are likely to remain at extreme lows in 2021. This focus on returning income to investors is one of the main differences between REITs and stocks. REITs are required to pay out the bulk of their income, while common stocks can pay no dividends at all.
REIT for 2021: Essex Property Trust (ESS)
Like Realty Income, Essex Property Trust is also a high-quality REIT that is also on the list of Dividend Aristocrats. Essex Property Trust was founded in 1971 and became a publicly traded real estate investment trust (REIT) in 1994. It invests in west coast multi-family residential proprieties where it engages in development, redevelopment, management and acquisition of apartment communities and a few other select properties. Over 80% of Essex’s net operating income is derived from California, with the remainder from Seattle.
Essex has ownership interests in 246 apartment communities consisting of over 60,000 apartment homes. The trust has more than 1,800 employees and produced approximately $1.4 billion in revenue in 2019.
As an owner of real estate properties, Essex has not been able to completely avoid the coronavirus pandemic which has negatively impacted the economy. However, it has reported manageable declines, as the company benefits from a high-quality property portfolio. In the third quarter, core FFO-per-diluted share declined by 6% as same-property gross revenue fell by 6.7%.
Investors can expect Essex to return to growth in 2021. Its operational focus provides a long runway of growth, and the company has an established track record of generating steady growth. According to Essex, it has generated 8.4% annual FFO-per-share growth and 6.4% annual dividend growth since its IPO.
Future growth is likely thanks to its strong property portfolio. The U.S. West Coast has high economic output (California and Washington combined would have the 5th highest GDP in the world) as well as limited supply. These are favorable characteristics for continued growth.
Essex currently yields 3.5%, a solid yield that is more than double the average dividend yield of the S&P 500 Index. It is also a strong dividend growth stock. It has increased its dividend for 26 consecutive years, including a solid 6.5% raise in 2020.
REIT for 2021: Digital Realty (DLR)
Digital Realty is an especially appealing REIT for 2021, not just for income investors but also for investors looking for growth among REITs. Digital Realty is one of the REITs benefiting most from the explosive growth in data. Its properties are a combination of data centers that store and process information, technology manufacturing sites, and Internet gateway data centers which allow major metro areas to transmit data.
Acquisitions will add significantly to Digital Realty’s growth. In 2020 the company closed on its $8.4 billion acquisition of Interxion, a provider of cloud data centers in Europe. Not only does the deal immediately boost the company’s revenue, it also further diversifies its portfolio in Europe. Upon closing, Digital Realty is an even bigger industry leader with 280 data centers around the world with 86% total occupancy.
The explosive growth of data in the past several years shows no signs of slowing down. This has enabled Digital Realty to continue growing revenue in 2020, even in a highly difficult year. In the 2020 third quarter, revenue of $1.02 billion increased 27% from the same quarter last year. The Interxion acquisition added to revenue growth. Core funds from operations fell from $1.67 to $1.54 per share, but the company continues to generate strong FFO which is used to invest in growth and reward shareholders.
Digital Realty has a 3.3% dividend yield, and the company has increased its dividend for 15 years, including a 4% raise in 2020. Continued growth of the data industry should provide the fuel for many dividend increases in the years ahead.