Smart investment strategy:Look for REITs with an advantageous investment strategy. For instance, Welltower partners with some of the most experienced operators in the business to run its properties, such as Genesis Healthcare and Brookdale Senior Living. AvalonBay is able to build apartment buildings for about 25% less than their market value, resulting in instant value creation for shareholders.
Dividend growth:Look for REITs with a strong track record of increasing dividends. For example, AvalonBay has increased its dividend at an average rate of 5.3% over the past 21 years. Realty Income has increased its payout 83 times since going public in 1994 and is a member of the S&P High Yield Dividend Aristocrat index. Finally, Welltower has managed to keep up a 5.1% average dividend growth rate for 45 years.
Stability:Stable REITs don't carry excessive levels of debt and have investment-grade credit ratings that allow them to borrow money cheaply to take advantage of new investment opportunities as they arise. Not every REIT needs to operate virtually debt-free, as Public Storage does, but I look for less than half of a REIT's funding to come from debt. For example, Welltower's 30.4% debt-to-enterprise value ratio is similar to having an outstanding mortgage balance of less than one-third of your home's value. And, the company's 4.5 times interest coverage ratio means Welltower earns $4.50 for every $1.00 in interest it pays on its debts. Finally, Simon Property Group has an A/A2 credit rating, the best in the REIT sector, giving it the competitive advantage of cheaper funding than the competition.
The potential is tremendous
Because of the high income potential combined with property value appreciation, the right kind of REITs can deliver consistent market-beating total returns over time. In fact, all five of the REITs mentioned here have handily beaten the S&P 500's total return over the past 20 years.
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