In 1960, President Eisenhower changed income investing forever.
That’s when he signed the Cigar Excise Tax Extension, spanning a variety of unrelated tax laws. Buried inside this 13-page bill was the Real Estate Investment Trust Act.
Better known as REITs, these investments were once the domain of the wealthy. Now, anyone can invest in large-scale, diversified portfolios of income-producing real estate.
Traditional REITs invest primarily in the retail, office, and residential sectors. They lease space then collect rent on that real estate. The income generated is paid out to shareholders in the form of dividends.
And they have special tax provisions. REITs must pay out at least 90% of their taxable income to shareholders. In turn, shareholders pay the income tax.
REITs have long been a favorite when looking for consistent, reliable income streams. They throw off enormous amounts of cash for shareholders. And they produce yields that crush what the average S&P 500-listed company offers.
For example, take the FTSE Nareit Composite REIT Index. This is an index of U.S. equity and mortgage REITs. As I’m writing this, at the beginning of June, 2020, it has a dividend yield of 4.5%. That’s more than double the 2% dividend yield of the S&P 500.
And they don’t stop at reliable, growing dividends. REITs also deliver fantastic long-term capital appreciation opportunities. Over the last 20 years, the FTSE Nareit Composite Index provided investors with an incredible 9.6% compounded annual return.
By comparison, the Russell 1000, a large-cap index has only produced a meager 6.2% annual return. And the almighty S&P 500 has produced an annualized return of 6% over the last 20 years.
So it’s easy to see why investors have flocked to REIT investments. They offer reliable, growing income along with market-beating total returns.
With that popularity, as you would expect, the landscape has evolved. Enter “non-traditional” REITs.
The ‘New’ REITs In Town
Non-traditional REITs don’t generate income from the office, retail, and residential spaces. Instead, they generate income from the rise in technology.
These new-era REITs offer consistent, growing dividends and strong capital appreciation. They’ve also got massive tailwinds from some fast-growing industries.
Data centers are one of those industries. They provide critical support for the e-commerce and online economy. These huge warehouses store networking equipment like hardware and cloud servers. Among the users of these sophisticated facilities you’ll find Amazon, Alphabet and Facebook.
Then there’s the communication infrastructure side of things. This is an industry propelled by increased data usage. And it will continue to grow with smartphone penetration and the oncoming 5G network.
These non-traditional REITs produce stable and predictable cash flow. And they’re seeing accelerated rental growth rates. As you know… growth attracts money and investors.
Now, some of these new-era REITs may not boast the lofty dividend yields of their traditional counterparts. But that doesn’t mean they aren’t noteworthy income-producing investments.
The three-year compounded annual returns provided by infrastructure REITs are 25.4%. Data center REITs come in at 15.5%. In other words, massive capital appreciation plus reliable, growing dividends.
Another benefit of non-traditional REITs is that these industries should continue to excel. Not even a pandemic will slow the use of cell phones, data transmission and internet activity.
So, let’s get to one of my top picks in the non-traditional REIT space…
Prologis, Inc. (NYSE: PLD)
Have you ever wondered how it’s possible for Amazon to deliver a package in two days, or even the same day? Well, it’s because of companies like Prologis (NYSE: PLD).
Prologis is a global leader in logistics real estate. That’s right… its massive warehouses store all those goods. It owns and leases 3,840 buildings to more than 5,000 customers around the globe. Customers like Home Depot, FedEx, and Amazon, with a current occupancy rate of 95.5%.
In 2019, Prologis generated more than $3.3 billion in sales — an 18.8% increase over the previous year. Funds from operations came in at almost $2.6 billion last year. That’s more than a $300 million improvement over 2018.
Over the last five years the company has grown sales at an average annual pace of 13.6%. And it’s consistently churned out EBITDA margins of 64% over the last few years.
Investors saw some of that growth when the company reported first quarter earnings. Funds from operation came in at $847 million, a staggering 63% improvement over the same quarter a year ago. That growth should continue as the e-commerce industry maintains its double-digit annual rise.
As Prologis grows cash flow, it will also grow the cash it pays out to shareholders. It’s already increased its dividend six times in the past five years, growing more than 60% over that time. It’s expected to dish out $2.32 per share in annual dividends this year, which gives the stock a dividend yield of 2.5%.
Now, that’s not a yield that will excite many income investors. But we have to keep in mind that this REIT is also enjoying massive capital appreciation. Shareholders who bought Prologis three years ago are already up more than 80%. Compare that to the meager 25% return delivered by the S&P 500 over the same time.
The bottom line is that this REIT offers reliable, growing income to investors. And it’s backed by the major catalyst of e-commerce. So Prologis should provide investors with market-beating returns for years to come. It’s no wonder why the stock has 12 “Strong Buy” recommendations from analysts.
The landscape of REITs may continue to evolve. But when it comes to consistent, reliable income streams, they’ll likely be at the top of the list.
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