Real estate is an excellent way to generate income, but owning a diversified portfolio of physical properties is a huge endeavor. If you've invested in some rental assets but would like more diversification, including real estate investment trusts (REITs) in the mix is a quick, easy way to achieve your goal. If that sounds like a plan, you need to look at industry-leading names Ventas (NYSE: VTR), Realty Income (NYSE: O), and Digital Realty Trust (NYSE: DLR).
1. A tough time
If you want to put some money to work today, Ventas is a great REIT to look at. The company owns a diversified collection of healthcare properties, with exposure to senior housing, medical office buildings, medical research facilities, and hospitals, among other things. It's one of the largest names in the healthcare space.
That said, the coronavirus pandemic has been difficult and basically resulted in a roughly 45% dividend cut in 2020. At this point, however, it looks like business is starting to turn higher thanks to an aggressive vaccine rollout.
The big story here, however, is the long-term demographic trend of an aging population. While COVID-19 was a clear speed bump, it hasn't changed the fact that baby boomers are cresting into retirement in huge numbers. That will lead to a massive increase in the senior population, a group that simply needs extra medical care than younger groups. To put a number on that, Ventas estimates that the senior population will grow 11 times faster than the general population in the coming days.
This diversified healthcare REIT is struggling today but is poised to serve the growing senior population for years to come. Buy today, and you can collect a 3.19% yield while you wait for Ventas' business to turn around.
2. Big and getting bigger
Net lease specialist Realty Income is one of the largest REITs around, but it just inked a deal to buy smaller peer VEREIT (NYSE: VER) to create a $50 billion market cap industry giant.
Net lease REITs own single-tenant properties for which the tenants are responsible for most property-level expenses. It's generally considered a low-risk approach in the real estate sector. Realty Income focuses on retail assets, which make up around 85% of its portfolio (that number will remain about the same after the acquisition is consummated near the end of 2021). The rest today is in industrial and office properties, but after the deal, the office assets will be spun off. So, it's probably best to look at Realty Income as a retail and industrial REIT.
Scale brings benefits in the net lease space (lower financing costs and the ability to take on bigger deals, for example), so this is a pretty good deal. And it's expected to add to adjusted funds from operations (FFO), a REIT metric similar to earnings for an industrial company, in the first year.
Meanwhile, Realty Income has increased its monthly pay dividend annually for 25 consecutive years, making it a Dividend Aristocrat. There is a lot to like here, even without the VEREIT acquisition. The yield today is around 4%, about the middle of the yield range over the past decade. While hardly a bargain, it's a fair price for a great REIT that's about to get even better.
3. The technology future
The last name here is Digital Realty, which owns a globally diversified collection of data centers. Essentially, it provides the backbone of the internet, as companies increasingly look to use the cloud for their storage, processing, and client interaction needs. It's one of the largest, oldest players in the space, with material plans for continued growth. In fact, it's seeing increasing demand from customers thanks to the coronavirus pandemic pushing more people onto the internet for work and pleasure.
Digital Realty has increased its dividend for 16 consecutive years. The yield today is around 3%. This is a potential problem, especially if you have a value bias, since that puts the yield near the lowest levels in the company's history. That doesn't mean you shouldn't own it; it just means that if you don't own it, you should put it on your wish list for now and wait for a better entry point (perhaps around a 4.5% yield).
The key here is that this is a growth-oriented industry leader that doesn't get cheap very often, so keep an eye on it if you want to catch a good price. But given the trends in the technology space, it's a name you'll likely want in your portfolio at some point soon.
Three important names
The tough year Ventas lived through in 2020 has left the REIT in turnaround mode and a decent bargain at current levels. Realty Income is fairly priced right now and is about to make a huge leap forward in scale. Digital Realty is kind of pricey, but it doesn't go on sale often so it's worth putting on your wish list -- this way, you don't miss out when it does go on sale.
All three are big players in their respective niches and operate in areas in which a regular property owner would have a harder time competing. If you're looking to add some diversification to your real estate holdings, do yourself a favor and perform a deep dive on this trio of REITs today.