Real estate has historically been an excellent investment. It produces competitive returns and passive income with less volatility than stocks. That makes it a great addition to any portfolio.
You don’t need much money to start investing in the sector. Real estate investment trusts (REITs) are low-cost, enabling anyone with $1,000 (or less) to add some real estate to their portfolio. Three top options beginners will want to grab are AvalonBay Communities (AVB 0.55%), Realty Income (O 0.40%), and W.P. Carey (WPC 0.55%).
A top-notch landlord
AvalonBay Communities is one of the largest apartment owners in the country. The residential REIT has interests in 299 apartment communities across a dozen states, with another 17 under development. The company primarily focuses on high-cost coastal cities but has started expanding into faster-growing markets across the southeast in recent years.
The REIT’s diversified apartment portfolio produces steadily rising rental income. Demand for apartments is strong, while housing supply remains tight, enabling it to increase rents. The company is working to address the country’s housing issues by developing new apartment communities and funding other developers through its structured investment program. These factors provide AvalonBay with the rising cash flow to pay a compelling and growing dividend that currently yields more than 3%.
That payout is on a rock-solid footing. REIT pays out less than 70% of its cash flow to support its dividend, giving it plenty of cushion and enabling it to retain funds to expand. It also boasts a top-notch financial profile. These factors make it a great real estate stock because it should be able to pay a growing dividend and produce attractive total returns.
A steady performer
Realty Income focuses on owning free-standing commercial buildings, primarily leased to retailers and industrial companies. It holds over 11,000 properties across the U.S. and Europe leased to long-term contracts with high-quality tenants.
That portfolio supplies the company with very stable rental income, allowing Realty Income to pay a consistent dividend. It makes monthly payments instead of quarterly ones, making it ideal for those looking for passive income from real estate.
Realty Income has steadily increased its dividend. It has given its investors 116 raises since its public listing in 1994, growing its payout at a 4.4% compound annual rate. With a conservative dividend payout ratio and strong balance sheet, Realty Income has the financial flexibility to continue expanding its portfolio. That should enable the REIT to keep increasing its dividend.
A steady grower
W.P. Carey owns a diversified real estate portfolio. The REIT invests in operationally critical properties in the industrial, warehouse, office, retail, and self-storage sectors. It leases these properties to high-quality tenants under long-term contracts that supply it with stable rental income.
The diversified REIT pays an attractive dividend — currently yielding around 5% — that it has increased every year since coming public in 1998. W.P. Carey should be able to continue growing that payout in the future. It has a solid financial profile, giving it the flexibility to continue acquiring cash-flowing real estate. The company has already made $1.1 billion of deals this year and expects to complete $1.75 billion-$2.25 billion before 2022 ends. Meanwhile, it acquired another REIT for $2.7 billion. These deals should grow its rental income, which would allow it to keep increasing the dividend.
Top-notch real estate stocks
AvalonBay Communities, Realty Income, and W.P. Carey are some of the best REITs. They have durable real estate portfolios that produce steady rental income. That gives them the funds to pay attractive dividends while also expanding their portfolios. Those features make them great REITs for beginners to get their hands on since they’re lower risk compared to other REITs and should produce attractive investment returns.
Matthew DiLallo has positions in AvalonBay Communities, Realty Income, and W.P. Carey. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.