Now that everyone’s a bit fearful, it’s time for us contrarians to get greedy for yield.
Last week, we discussed three great dividend stocks to buy now and hold forever. These top-notch businesses are going to grow their earnings steadily in the years and decades ahead. And they’re selling at discount prices for the moment, thanks to China’s roulette wheel of a market (which has zero bearing on these companies long-term).
My only problem with these firms? Even at bargain prices, the highest payers only dish 3.1% annually.
Real Estate Investment Trusts (REITs) provide an answer to the yield dilemma. By definition, they send most of their earnings back to investors in the form of dividends. And there hasn’t been a better time to buy these issues this decade.
The Vanguard REIT Index Fund (VNQ) lost 3% last year, and shed another 3% in January. Investors worried that Fed Chair Janet Yellen would raise rates to the point that everyone will look to safer vehicles (like Treasuries) for yield.
What’d they miss? They confused one measly rate hike with an entire cycle. Just one month ago, the Fed funds futures market was expecting another half-point raise by the end of 2016…
Fed Fund Futures “Implied Probabilities” for Dec 2016 – Last Month
Today, they’re betting on either no rate change, or a quarter-point at best!
Fed Fund Futures “Implied Probabilities” for Dec 2016 – Today
Other investors are coming around to this reality as well, and back to REITs slowly but surely. VNQ still boasts an attractive yield by historical standards – its highest this decade, in fact – thanks to last year’s selloff.
VNQ’s 4% Yield: Its Highest This Decade
While REITs pay their investors well, that doesn’t have to be at the expense of long-term growth. While some firms are certainly “yield cows” that pay big dividends today at the expense of tomorrow, there are some special issues that deliver both dividends and ever-rising profits.
Here are five such “sweet spot” REITs that are permanently on my watch list:
Crown Castle International (CCI) is the largest provider of shared wireless infrastructure in the U.S. Mobile data usage is doubling every two years in the U.S. CCI owns cell towers and rents antenna space to the carriers, primarily in and around cities. It’s a good place to be a landlord.
The company converted to a REIT structure two years ago. Since then, it’s already increased its dividend more than 250%. CCI pays a 4.1% yield today that’s comfortably supported by a 73% payout ratio (anything under 90% is fine for a REIT).
As current leases expire, CCI will raise the rent on its tenants. Those increases will flow directly to investors in the form of higher dividends.
Digital Realty Trust (DLR) is a landlord for data centers. Like mobile usage, this is a big growth market. Every Facebook “Like” or Google search on the planet is processed through a data center. DLR buys and develops these facilities, and then leases them back to the company (such as Facebook).
The stock pays a 4.3% dividend today. DLR has increased its dividend every year since its IPO in 2004. It shouldn’t have any problem continuing this streak with growth in cloud computing a sure thing for the years ahead.
Competitor CoreSite Realty Corporation (COR) has rewarded its investors with an amazing 445% return over the last 5 years. It’s raised its dividend by 308% over the same time period. This has all been driven by 17% compounded annual revenue growth and 24% annual growth in funds from operation (FFO) over the last three years.
The stock yields just 3.3% today. But if the current growth rate continues for a few years, that payout could double in just a few years.
Extra Space Storage (EXR) should keep profiting from huge demand for self-storage. Occupancy levels in the industry are now north of 90%, and shareholders in the space have already enjoyed triple-digit returns over the last 5 years.
EXR boosted its dividend by a surreal 321% over that time period. It pays a 2.6% yield today, and is projected to grow profits by 22% in 2016. Another big dividend hike should follow. At this rate, new investors will be earning 5% dividends on their initial stakes within three years or so.
Finally Sun Communities (SUI) operates a couple hundred manufactured home and RV communities across the U.S. With 77 million baby boomers just starting to retire, Sun’s going to see rising demand for years to come. The stock pays 3.8% today.
And while I love the retiring boomer trend, I’ve got a better way to play it than SUN. You see, as the Baby Boom generation gets older, they’re going to demand more and more care. In fact, healthcare spending in the U.S. will increase to $5.43 trillion by 2024.
My top three favorite REITs to buy and hold forever are focused in this healthcare niche. Their yields today are already quite generous at 7.2% or better. And, like the five stocks I highlighted above, these firms are also boosting their payouts significantly every year (in fact, one firm bumps its dividend every quarter.)
Most investors haven’t heard of these companies yet, so prices could soar 15-20% in just the next 12 months as they pile into these reliable payers. Get the details on all 3 and start profiting right now.
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