Why I Just Bought These 2 High-Yield REIT Stocks

Keith Speights, The Motley Fool

Fri, Sep 13, 2024, 3:50 AM 4 min read

1. Solid businesses with great long-term prospects

I like buying stocks and holding them for years. My top criteria in picking stocks are the strength of their underlying businesses and how likely they are to perform well over a long period. Both Realty Income and National Storage Affiliates (NSA) check off those boxes nicely.

Realty Income ranks as the seventh-largest global REIT with a market cap in the ballpark of $55 billion. It's been in business for 55 years and boasts a solid A3 and A- (medium investment-grade) credit rating from Moody's and S&P, respectively.

The REIT's diversification is a big plus. Realty Income owns 15,450 properties with clients spanning 90 industries. Its top tenants include Dollar General, Walgreens, Dollar Tree, and Wynn Resorts. However, no client makes up more than 3.4% of annualized contractual rent.

Realty Income has good growth prospects in the U.S., including opportunities in retail, consumer-centric medical, and data centers. However, the big prize for the company is in Europe, which represents a total addressable market of $8.5 trillion.

NSA is much smaller than Realty Income, with a market cap below $4 billion. It owns 1,052 self-storage properties spread across 42 states and Puerto Rico. Roughly 65% of NSA's properties are located in the Sunbelt, a region with an influx of migration and strong employment and housing trends.

Self-storage is an especially attractive real estate niche. Not only have self-storage REITs outperformed other REIT sectors over the last 30 years, but they've also been significantly less volatile.

I like NSA's growth prospects largely because of fragmentation in the self-storage market. The top 50 operators only claim 32% of the total market, based on the number of facilities. NSA's market share is only 2%.

2. A nice head start on strong total returns

Realty Income offers a forward dividend yield of 5.02%. The company has also increased its dividend for an impressive 29 consecutive years, with a compound annual growth rate of 4.3% since 1994.

NSA isn't too far behind, with a forward dividend yield of 4.75%. The REIT boasts a decent track record of dividend hikes, as well, and has increased its dividend for eight consecutive years. What's especially notable is that NSA has grown its dividend by a whopping 75% over the last five years.

I don't rely on dividend income yet, although it could help fund my retirement down the road. The key advantage of Realty Income's and NSA's great dividends, in my view, is that they provide a nice head start for both stocks in delivering strong total returns.

3. A Fed-driven catalyst could be on the way

I invest for the long term, but I certainly don't mind if the stocks I buy have positive short-term catalysts. Both Realty Income and NSA could have a Fed-driven catalyst on the way.

The Federal Reserve seems likely to reduce interest rates later this month. With any luck, this will be the first of several rate cuts.

REIT stocks often respond well to lower interest rates for a couple of reasons. First, they rely on borrowing to purchase additional properties. When rates decline, they can invest in expansion at lower costs. Second, lower rates drive bond yields down. Income investors could view REIT stocks as attractive alternatives to bonds when interest rates fall.

Again, this isn't my top reason for buying Realty Income and NSA stocks. However, I think there's a good chance that my investments will pay off sooner rather than later, thanks to the likelihood of the Fed cutting interest rates.

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Keith Speights has positions in Dollar General, National Storage Affiliates Trust, and Realty Income. The Motley Fool has positions in and recommends Moody's, Realty Income, and S&P Global. The Motley Fool has a disclosure policy.

Why I Just Bought These 2 High-Yield REIT Stocks was originally published by The Motley Fool

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