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3 Perfect REITs to Buy for a Dovish Fed

With a dovish Federal Reserve, Real Estate Investment Trusts are a good place to invest right now. Here are three perfect REITs to buy now.


There are a lot of good REITs to buy in the current market environment. Not only do REITs (Real Estate Investment Trusts) offer a high degree of safety and income in an uncertain market, but there are a few other factors playing into the sector’s wheelhouse as well.

REITs enjoy a special tax exemption provided they pay 90% of profits, after expenses, out to shareholders in the form of dividends. By paying out money normally lost to taxes, REITs pay a higher level of income than most regular dividend stocks. The Vanguard Real Estate Income Fund ETF (VNQ), for example, currently pays a yield of about 4% compared to just 1.86% for the S&P 500.

The investment class also enables you to participate in the real estate market without the hassles of doing so on your own. Instead of searching for properties and becoming a landlord you can just buy a stock with daily liquidity and collect the dividends. Over time, sector returns tend to underperform those of the overall market but with less volatility. Like any other market sector, REITs go in and out of favor.

A key issue favoring the performance of REITs right now is the Fed. As income-oriented investments, REITs can be sensitive to rising interest rates, as investments in bonds become more competitive. The Fed’s recent announcement that rates will not be raised for the rest of the year - and the likelihood that it will actually cut interest rates, perhaps as early as next month - eliminates a potential headwind. As well, the whole real estate market tends to get a boost with positive interest rate news as more affordable mortgages spur demand, especially in this strong economy.

But there’s more to the current story. Most U.S. REITs operate domestically. That means REITs are relatively unaffected by the recent volatility associated with China trade headlines. As the market gets more uncertain, conservative and income-generating investments that are actually immune from the cause of the volatility are a nice place to be.

Of course, there are lots of REITs out there and it matters which ones you invest in. Here are three REITs to buy right now.

3 Perfect REITs to Buy for a Dovish Fed

REITs to Buy #1: STORE Capital Corp. (STOR)

This under-the-radar REIT operates in the retail space. That may seem like a bad idea right now. Aren’t brick and mortar retailers closing like crazy? Yes, but this well-run REIT is actually benefitting from the shifting retail environment. Let me explain.

STORE Capital’s properties tend to be located in the more popular, contemporary strip malls and city/mall combination spaces, not in the dying indoor malls. As well, STORE’s tenants are those that don’t compete with the internet. The largest property holdings are in desired experiences like restaurants, early childhood education centers, movie theaters, and health clubs. Such services are thriving.

The REIT also has a good formula for the current environment in that leasing saves the lessee money. They don’t have to shell out upfront cash and be in the real estate business. STORE capital primarily uses triple net leases, where the lessee pays all the expenses and maintenance. The arrangement cuts down on unforeseen expenses and provides a more predictable cash flow. Most contracts are 15 years or longer and the REIT has a nearly 100% occupancy rate.

Performance has been stellar, as the REIT has consistently outperformed both its peers and the overall market. STOR is also a favorite of Warren Buffett’s. As well, the stock has strong down market credentials as it barely budged during the December selloff. The stock pays a dividend of 3.7% and should continue to thrive.

REITs to Buy #2: Stag Industrial Inc. (STAG)

This is a relatively unknown specialty REIT. The company primarily rents out industrial space to tenants. There are a few reasons why this is a great business right now. First, there is currently a shortage of supply and high demand for these properties. The sector is benefitting from massive new demand for warehouse and industrial space because of the proliferation of online retail as well as the thriving economy.

These properties are also low cost and low maintenance spaces. People are fussy creatures; keeping them happy is a pain in the butt. These warehouse and industrial spaces are bare bones properties that house stuff, not people. It’s good business.

The stock has been a stellar performer, returning over 17% per year for the last three years and 25% so far this year. Even with the recent performance the stock pays a high yield of 4.6%. And the current environment should continue to be kind to this stock.

REITs to Buy #3: Realty Income (O)

This is a different kind of pick. It is perhaps the most well-known REIT in the country. This REIT was one of the first on the market. It’s been around since 1994 and has returned an average of 16.9% per year since, blowing away the returns of its peers and the overall market.

This REIT has been such a great performer and reliable monthly dividend payer that is has the hubris to call itself “The Monthly Dividend Company.” It has paid dividends for 586 consecutive months and raised that dividend for 86 consecutive quarters at an average 4.6% annual rate.

It has primarily used the same formula as STOR with low expenses and predictable triple net lease agreements. The REIT portfolio is in 49 states with over 5,800 properties under long-term net lease agreements. It has 261 commercial tenants and 48 retail and other tenants.

I mention this REIT as well because you might want to just get a REIT ETF and play the overall sector. But I think Realty Income is a better idea because it has consistently outperformed those ETFs. It currently pays a 3.8% dividend, and the payout will most certainly increase.


*This post has been updated from an original version.

Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.