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 manage falling markets. But the term “real estate” covers a lot of ground, and real estate stocks haven’t fared much differently from the broader stock market of late.
Still, many of these stocks have impressive track records of dividend payouts and long-term total returns that make them good choices to consider now, especially if you’re focusing on strong companies in growing markets. Here are two such hot sectors investors might consider shelling out $1,000 now.
Commercial real estate services giant CBRE expects new household formation to continue to drive rental demand, and expects multifamily occupancy rates to remain above 95% nationally for the foreseeable future. Rent growth is expected to moderate, but this high level of occupancy will keep rental income flowing, and there are several ways to capitalize on this opportunity.
These include: buying rental properties and managing them yourself or hiring a property manager or management company; buy property through partnerships or pools from syndication platforms such as Realty Mogul Where crowd street; or perhaps – the simplest and most liquid of all – investing in publicly traded real estate investment trusts (REITs).
A good example of the latter, the one I’m considering buying soon, is Essex Land Trust (ESS 0.18%) an owner-operator of high-end apartment complexes in warm West Coast markets where home prices have soared.
By law, REITs are required to return at least 90% of their taxable income each year to shareholders in the form of dividends, and Essex is a veritable paying machine with a record 29 consecutive years of increases. As such, he is a dividend aristocrat.
Essex’s stock, meanwhile, is down around 27% year-to-date, pushing its yield to around 3.4% and its price-to-funds-of-operating (FFO) ratio ) per share at a moderate 17.6. FFO is a good indicator of dividend sustainability and Essex’s current payout to earnings ratio of around 57% based on estimated 2022 earnings also makes continued dividend performance quite sustainable.
Growth of digital infrastructures
According to researchers at Future Market Insights, the international 5G technology market will grow at a compound annual rate of approximately 72% over the next six years. It’s a pretty frenetic pace, and while digital communications networks aren’t usually seen as real estate opportunities, they are.
There are two great examples of how real estate investing comes into play here: data centers and mobile communications infrastructure. Both provide the physical frameworks for transmitting the massive 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 (AMT 2.09%) and equinix (EQIX 2.78%). Both are REITs and the largest of their kind. American Tower has a global network of more than 220,000 mobile communications sites on six continents. Equinix has approximately 240 data centers around the world. Both are essential providers of the 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-to-FFO ratio per share of around 21.4 after seeing its share price fall around 14% year-to-date. The market values Equinix stock a bit higher by this metric, at a ratio of 26. Its stock price is down about 22% year-to-date. The dividend yield for American Tower is around 2.3% while it is around 2% for Equinix. Their payout rates based on 2022 earnings estimates are also very sustainable: around 54% for American Tower and 44% for Equinix, respectively.
There are REITs and other stocks that offer higher returns, sure, but these two companies are in industries with high barriers to entry and a level of indispensability for their clients that gives each of them a moat around their business and room for growth in the future.
A three-way tie? Invest in each.
Both of these types of real estate – multifamily and digital/mobile infrastructure – are in high demand, and there’s reason to believe these trends will continue. If you have $1,000 to commit now and are looking for smart choices, I recommend splitting that money equally between Essex Property Trust, American Tower, and Equinix. Given their depressed stock prices and positive outlook, these investments should do very well.