"Safety first" is a mantra conservative investors should be repeating to themselves constantly right now, with the market hovering around all-time highs. But if you have money to put to work and can't stand holding cash, what are you supposed to do? One strong answer is to focus on the biggest and best players when looking at stocks. Here are three real estate investment trusts (REITs) that fit that bill for low-risk investors.
1. Getting even bigger
Realty Income (NYSE: O) is one of the largest net lease REITs you can buy, with a portfolio of roughly 6,600 single-tenant properties. It has an investment-grade-rated balance sheet. And it has increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat. In fact, it upped its dividend each quarter in 2020, despite the pandemic headwinds. If you are looking for a big, reliable REIT, Realty Income is probably one of the best options you can own.
But the story gets even better. The REIT is looking to extend its industry-leading position by acquiring peer VEREIT (NYSE: VER), which will expand its portfolio to over 10,000 properties. One important fact here is that net leases require the tenant to pay for most of the operating costs of the properties they occupy. The core business model here is generally considered a low-risk approach in the real estate space and scale affords material financing benefits. That makes Realty Income even more attractive for conservative types.
The current yield is around 4%, about in the middle of the range over the past decade, so it's not exactly a bargain today. But paying a fair price for a great REIT is probably worth the price for risk-averse long-term investors.
2. Growing where the action is
Prologis (NYSE: PLD) is one of the largest industrial REITs in the world, with a portfolio of more than 4,700 buildings. Most of its assets are located in and around core transportation hubs in North America, South America, Asia, and Europe. The company estimates roughly 2.5% of the world's GDP passes through its warehouses. It has an investment-grade-rated balance sheet, and while its dividend hasn't been quite as reliable as Realty Income's over time (it was cut during the 2007 to 2009 recession), it has increased for seven years at this point.
Its size and scale makes it a valuable one-stop shop for companies, but there's another underlying theme here that is really attractive: Prologis has built nearly half of its portfolio. And it has land that it believes can support $17 billion of future development. So not only is Prologis big and financially strong, it has growth opportunities built right into its well-positioned portfolio.
The roughly 2% yield is a bit miserly, but if you're looking for a REIT that can withstand the test of time, this industry-leading warehouse landlord is worth a deep dive. At the very least, it's worth putting on your wishlist.
3. Supporting the digital future
Digital Realty (NYSE: DLR) owns over 290 data centers across the planet. These are the high-tech buildings that house the computers that support the backbone of the internet. The REIT is one of the largest names in the space. It has an investment-grade-rated balance sheet. And it has increased its dividend annually for 14 consecutive years.
The REIT has made use of acquisitions and ground-up construction to grow over the years, and, as the dividend record shows, has clearly put up a solid track record. But the key here is that the world is only going to get more digital and connected as time goes by. So the same levers that have helped Digital Realty grow historically should become more important in the future.
The roughly 3% dividend yield is historically low, so this isn't a value play. However, for investors looking for a quality REIT with material growth potential, Digital Realty will fit the bill. Note, too, that the average annualized dividend increase over the past 14 years was a huge 10%, so the REIT has a track record of rewarding investors well as it expands.
Paying for quality
One thing that investors should notice here is that none of these REITs are particularly cheap. That's not surprising, given their industry-leading positions, financial strength, and growth potential. While value investors will probably want to look elsewhere, conservative investors in search of the highest-quality REITs recognize that sometimes it's worth paying more for quality.
Of this trio, Realty Income looks like the best deal right now, with Prologis and Digital Realty both falling onto the more expensive side of the ledger. While that may keep some investors away from the pair, they should still find their way onto your wishlist. They don't get cheap often, but if they do, low-risk investors should probably pounce.