Buoyed by the expectation that interest rates have peaked and could soon be nosing down, the stock market had one of its best stretches of 2023 so far in early November.
After a weak 2022, that performance helped put major indexes such as the S&P 500 in the black for the year so far. But the turnaround hasn’t been uniform, of course.
For instance, publicly traded real estate investment trusts (REITs) overall remain in the red for the year. These owners of income-producing pools of property are particularly sensitive to interest rates. Because they’re required to pay almost all of their taxable income out in dividends, they don’t typically retain a lot of cash and need to finance their growth through borrowing and stock issuances.
But as is so often the case, the baby can get thrown out with the bathwater in this kind of market, and bargains can be found in the REIT sector. Two such reliable income stocks to consider are Realty Income (NYSE: O) and Alexandria Real Estate Equities (NYSE: ARE).
This chart shows how poorly these two widely held REITs have fared year to date, compared with a benchmark REIT index and the S&P 500.
Office space is cratering in the commercial real estate market, as expectations fade for a full return to the office.
But Alexandria Real Estate Equities may be suffering guilt by association here. While it’s typically categorized as an office REIT, it’s not like the others. Alexandria has always focused strictly on providing specialized space to life science and biopharma specialists large and small. That’s not the kind of work that you can do at home.
That focus includes developing and acquiring collaborative must-have office and lab space in campus settings in desirable markets such as its hometown of San Diego, Silicon Valley and environs, Seattle, Research Triangle in North Carolina, Boston, New York, and Washington, D.C.
Alexandria’s stock is down about 32% so far this year at less than $100 a share. But analysts give it an average target price of $144.33, a pretty nice potential upside, and it’s raised its dividend for 14 straight years.
Then there’s Realty Income, one of the best-known REITs in the universe of publicly traded stocks. The business, which bills itself as “The Monthly Dividend Company,” has paid out 640 straight monthly dividends and raised its payout every year for three decades.
This REIT, also based on San Diego, now boasts a portfolio of more than 13,000 properties diversified by geography, sectors, and tenants. While still primarily a retail REIT, despite some large moves into the casino business, Realty Income is using its impressive balance sheet and proven savvy to continue expanding.
That has to come in big gulps to make a noticeable difference in an enterprise this size. That just happened again with the recent announcement that Realty Income would pay $9.3 billion in stock to acquire Spirit Realty Capital (NYSE: SRC) and its more than 2,100 single-tenant retail and industrial properties.
Realty Income’s share price is down about 20% year to date, reflecting concerns about the effects of e-commerce, interest rates, and its own acquisitive ways, but that could also represent a good buying opportunity. The stock is selling for about $51 a share, with an analysts’ average target price of $61.90 pointing to some nice upside while you rake in the monthly payouts.
History could be on your side, and so could the future for these two REITs. Realty Income went public in 1994, and Alexandria Real Estate did so in 1997. This chart shows how they’ve performed in total return since the latter’s initial public offering in May of that year, easily outpacing the big index.
They also yield better. The S&P 500 is currently yielding about 1.6%, while Alexandria yields about 5% and Realty Income is at about 6%.
REITs are required by tax law to distribute at least 90% of their taxable income as dividends each year. While past performance doesn’t guarantee future performance, these two REITs have raised their dividends annually for many years and have experienced management overseeing portfolios and balance sheets to maintain that REIT imperative.
Meanwhile, their depressed prices could present an unusually favorable opportunity to score shares in these quality dividend stocks at bargain prices.
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Marc Rapport has positions in Alexandria Real Estate Equities and Realty Income. The Motley Fool has positions in and recommends Alexandria Real Estate Equities and Realty Income. The Motley Fool has a disclosure policy.
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