The real estate investment trust (REIT) industry has been a favorite among income investors and dividend seekers. Why? Because REIT stocks provide a steady monthly or quarterly distribution while also providing stability to any portfolio. In exchange for this stability and consistency, you generally will see relatively little price appreciation for REIT stocks, which can sometimes cap the potential upside of your investment.
REITs also aren’t valued by regular price multiples like other stocks. Instead, REITs use a metric called “Funds From Operations” or FFO. This is a better indication of how financially healthy a REIT company is.
Generally, REIT stocks are best suited for investors with a conservative strategy and low-risk tolerance. They are also beneficial for investors in or nearing retirement and seeking to produce income from their investments. However, any portfolio looking for just a touch of stability can benefit from strong REIT exposure. As such, this article will highlight three such REIT picks that you should consider adding to your portfolio.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR) is a REIT that focuses on owning and operating data centers. It rents out the spaces and facilities needed for companies to store equipment and build up data centers. Overall, Wall Street remains bullish on DLR with an average analyst price target of $147.53 and a street-high target of $175.00.
The demand for data centers to run advanced technologies like AI and machine learning has never been higher. One only needs to look at the recent earnings report from NVIDIA (NASDAQ:NVDA). The AI leader reported a 400% year-over-year growth in its data center revenue from 2023. Not surprisingly, Digital Realty and NVIDIA already have a strong partnership in place that is set to synergize into more long-term growth.
DLR has managed to continue to grow its FFO by a compounding annual growth rate of 11% from 2005. As of May 2024, it sits at an impressive $6.60 to $6.75 per share. With over 300 data centers under its control, Digital Realty is set to thrive from the rising demand for AI from some of its partners including Amazon’s (NASDAQ:AMZN) AWS, Alphabet’s (NASDAQ:GOOG, GOOGL) Google Cloud and Microsoft’s (NASDAQ:MSFT) Azure. As a cherry on top, DLR pays a quarterly distribution with a current yield of 3.42%.
Crown Castle International (CCI)
Crown Castle International (NYSE:CCI) is a REIT that rents out cellular towers and infrastructure to telecommunications companies. Wall Street analysts have an average price target of $110.87 for CCI which represents nearly 15% upside from its current price.
This REIT company owns more than 40,000 cellular towers and over 90,000 miles of fiber optic internet cable. One unique aspect of Crown Castle is that it operates solely in the United States. This sets CCI apart from other wireless infrastructure REITs like American Tower (NYSE:AMT). This localization to just the U.S. has also allowed Crown Castle to be the go-to REIT when renting out towers to major American telecom companies like T-Mobile (NASDAQ:TMUS) and AT&T (NYSE:T).
If there is one thing Crown Castle cares about, that’s returning capital to shareholders. This REIT pays a quarterly distribution with a current yield of 6.38%. Crown Castle also has a long-term dividend growth target of 7% to 8% annually. With an impressive trailing twelve months FFO per share of about $7.50 to top it off. Thus, it would be foolish not to keep this company on your watchlist.
WP Carey (WPC)
WP Carey (NYSE:WPC) is one of the world’s largest diversified net lease REIT companies in the world. The one-year price target range for this REIT is $55.00 to $65.00 with an average analyst target of $59.78. The high end of the range indicates a nearly 20% upside from the current price of WPC.
So what exactly is a net lease REIT? WP Carey purchases properties from companies and then immediately leases them back for a monthly rental fee. This allows the companies to raise money and capital while providing WP Carey with a reliable and trustworthy tenant. Recently, the company has chosen to exit the office sector in hopes of entering a transformational phase to replace its portfolio with stronger growth prospects.
With its business model producing such reliable rental income, it shouldn’t be a surprise that WPC pays a quarterly distribution with a yield of 6.09% to shareholders. While its recent FFO of $1.14 per share dipped slightly YOY, we remain certain that WPC is a great long-term investment that is transforming into a higher-growth diversified pick.
On the date of publication, Ian Hartana and Vayun Chugh did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
