It has long been said that real estate is a good hedge against inflation and that investing in it can help diversify a portfolio to better cope with falling markets. But the term “real estate” covers a lot, and real estate stocks haven’t fared much differently than the broader stock market recently.
Still, many of these stocks have impressive track records of dividend payouts and long-term total returns, making them good picks to consider now, especially when focusing on strong companies in growth markets. Here are two of those trending sectors that investors might consider losing $1,000 right now.
Commercial real estate services giant CBRE forecasts that household formation will continue to drive demand for rental housing and expects multifamily occupancy rates to remain above 95% nationwide for the foreseeable future. Rental growth is expected to moderate, but this high occupancy rate will keep rental income flowing and there are several ways to take advantage of this opportunity.
These include: buying rental properties and either managing them yourself or hiring a property manager or management company; Buying real estate through partnerships or pools of syndication platforms such as RealtyMogul or CrowdStreet; or perhaps — the easiest and most liquid of all — to invest in publicly traded real estate investment trusts (REITs).
A good example of the latter, which I plan to buy soon, is Essex Property Trust (ESS 1.37%) an owner and operator of upscale apartment complexes in hot West Coast markets where real estate prices have skyrocketed.
By law, REITs are required to return at least 90% of their taxable income to shareholders in dividends annually, and Essex is a veritable payout machine with a record of 29 consecutive years of growth. As such, it is a Dividend Aristocrat.
Essex stock, meanwhile, is down about 27% year-to-date, dragging its yield down to about 3.4% and its price-to-working capital (FFO) per share ratio at a modest 17.6. FFO is a good indicator of dividend sustainability, and Essex’s current payout-to-earnings ratio of around 57% based on estimated earnings for 2022 also suggests its continued dividend performance is quite sustainable.
Digital infrastructure growth
According to Future Market Insights researchers, the international 5G technology market will grow at a compound annual rate of about 72% over the next six years. That’s a pretty heady pace, and while digital communications networks aren’t typically viewed as real estate opportunities, they are.
There are two great examples of how real estate investing comes into play here: data centers and cellular infrastructure. Both provide the physical frameworks to transport the vast and rapidly growing amounts of data needed to support e-commerce, smart buildings and smart cities, gaming, streaming, and the billions of phone calls made every day over cellular networks.
Two stocks to consider in this space are American tower (GOVERNMENT OFFICE 2.50%) and equinox (EQIX 2.96%). Both are REITs and the largest of their kind. American Tower has a global network of more than 220,000 cell sites on six continents. Equinix has approximately 240 data centers worldwide. Both are essential providers of infrastructure that underpins the digital economy. They have been thriving for decades and will likely continue to thrive for a long time to come.
American Tower stock currently has a price/FFO ratio of about 21.4 after the stock price fell about 14% year-to-date. The market rates Equinix stock slightly higher at a ratio of 26. The stock price is down about 22% year-to-date. American Tower’s dividend yield is about 2.3%, while Equinix is about 2%. Their payout ratios based on 2022 earnings estimates are also very sustainable: about 54% for American Tower and 44% for Equinix, respectively.
There are certainly REITs and other stocks that pay higher yields, but both of these companies operate in sectors with high barriers to entry and a level of indispensability to their customers that gives each of them a competitive edge and room for future growth.
A threesome? Invest in everyone.
Both of these types of real estate – apartment buildings and digital/mobile infrastructure – are in high demand and there are good reasons to believe these trends will continue. If you have $1,000 to spare now and are looking for some smart tips, I’d recommend splitting that money equally between Essex Property Trust, American Tower, and Equinix. Given their low share prices and positive outlook, these investments should do well.