Wall Street has a bad habit of getting caught up in short-term stories because they are exciting. That's just human nature, but it's a habit that investors need to fight. Instead, you should be focusing on long-term value as you buy companies that can differentiate themselves, not just for a year or two, but for decades to come.
Here are four real estate investment trusts (REITs) that have what it takes to do just that.
1. Realty Income: Size has its benefits
In 2021, Realty Income (O 0.04%) bought one of its largest competitors, increasing the size of its portfolio to more than 10,000 single-tenant net-lease properties. In a net lease, the tenant is responsible for most of the operating costs of the property it occupies. Over a large portfolio, this is a pretty low-risk business model in the REIT industry. The acquisition basically cemented Realty Income's place as the industry's market leader.
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Realty Income now has the heft to take on huge portfolio deals that its competitors couldn't manage. And, given its vast size (it has a $40 billion market cap) and investment-grade credit rating, the REIT has advantaged access to capital markets as well. This will help Realty Income as it looks to expand into Europe, a market management believes is about twice as large as the net-lease opportunity in the U.S., with only a fraction of the publicly traded competition. That should provide the REIT with years of growth, given that Europe is only just starting to warm to the net-lease approach and tends to favor strong, long-term relationships with large, reliable partners.
The current dividend yield is 4.1%, backed by a dividend that has been increased for more than 25 consecutive years, making Realty Income a Dividend Aristocrat.
2. Prologis: Growth from the ground up
One of the big trends today is growth in online shopping, which necessitates additional distribution infrastructure. With a market cap of more than $110 billion, Prologis (PLD -0.68%) is the name to beat in this sector. It owns warehouses in key transportation hubs in North America, South America, Europe, and Asia, containing nearly 1 billion square feet of space. It is a vital cog in the global market and is partnered with some of the biggest names in the world.
But what's most exciting here is that during the past 20 years, Prologis's capital investment efforts have yielded an estimated 20.8% internal rate of return. This is no small feat, given that it put $36.5 billion of cash to work in those construction plans. And, looking to the future, it has enough property to build another $21.1 billion worth of assets.
The stock is always pretty expensive, with a yield of just 1.6% today, but keep it on your wish list just in case there's a sell-off. Prologis is not only the leader in the warehouses, but it also has ample internal growth opportunities to keep rewarding investors for years to come.
DLR Dividend Yield data by YCharts
3. AvalonBay Communities: Another value builder
Prologis actually benefited from the pandemic in 2020, as the shift toward buying online accelerated when people were asked to practice social distancing. However, apartment landlord AvalonBay Communities(AVB -0.69%) didn't, as people moved out of the major cities the company tends to focus on.
However, that trend has reversed, and AvalonBay is again putting up strong occupancy and revenue numbers. That said, the REIT adjusted to the pandemic as you would expect, working to keep occupancy as high as possible by granting customers concessions. What it didn't do was stop investing for the future.
At this point, the apartment bellwether has $3.8 billion worth of capital investment projects in the works, including redevelopment and new construction. The company believes this spending will add as much as $145 million to net operating income. That, in turn, will mean a greater ability to raise dividends, contributing to an increase in the fundamental value of the company. This is the kind of consistency that long-term investors should want to see in a company they own.
The 2.5% yield is toward the low side, so it might be best on the wish list, too. But if there's another sell-off, this is easily one of the best apartment landlords you can own.
4. Digital Realty: A digital future
Prologis is a logistics play on the increasing growth of internet shopping, while Digital Realty (DLR 0.96%) is a play on the same general theme. This REIT owns more than 290 data centers around the world, serving some 4,000 customers. It is a major consolidator, and it just agreed to buy one of the biggest data-center providers in Africa. Digital Realty is positioned to play an expanding role as more and more gets done online.
The REIT's stock has recently fallen 10% or so, thanks to increasing competition and a difficult pricing environment. Basically, a lot of companies are trying to take advantage of what is likely to be a huge opportunity. The dividend yield is about 3%, which isn't great but isn't exactly bad, either, and it's worth mentioning that Digital Realty has increased the dividend annually for 17 consecutive years.
And, as noted, Digital Realty is a consolidator, which means that the competition today could end up being an acquisition target tomorrow as this major industry player continues its global expansion.
Don't look now -- look to the future
For investors who want to own great dividend-paying REITs, you need to start by looking at the company first and then considering the dividend and yield. Realty Income, Prologis, AvalonBay, and Digital Realty are all great companies that have material growth opportunities ahead of them.
Realty Income, with its generous current yield, and Digital Realty, with a recent price decline, could be interesting today, while the other two are more appropriate for the wish list. But all are names you could comfortably hold for years as they continue to execute on long-term plans to reward investors via business growth. That's what makes them no-brainer investment opportunities.
Reuben Gregg Brewer owns Realty Income. The Motley Fool owns and recommends Digital Realty Trust and Prologis. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
