The stock market has rallied sharply over the past several months, making back all its losses from a brutal bear market that began in early 2022, when the Federal Reserve started raising interest rates. It has been bumping up against new all-time highs this year. That rally is making it harder to find compelling investment opportunities.
However, not all stocks have been swept up in the market's updraft. Many real estate investment trusts (REITs), which are more sensitive to changes in interest rates due to their higher-yielding dividends, remain well below their highs. That includes some of the sector's highest performers: Prologis (NYSE: PLD), Extra Space Storage (NYSE: EXR), and Equity Lifestyle Properties (NYSE: ELS). With interest rates set to fall this year, these top REITs look like no-brainer dividend stocks to buy right now for those with around $1,000 to invest.
Strong total return potential
Prologis is one of the five best-performing REITs over the past decade. However, like most of its peers, it's trading well off its peak. Shares of the leading industrial REIT are more than 20% below their pinnacle from a few years ago. Even with that decline, Prologis has grown $1,000 into nearly $4,400 over the past 10 years.
That slump came even though Prologis has continued to increase its core funds from operations (FFO) and dividend at strong rates. As a result, it trades at a much lower valuation and offers a higher dividend yield (currently 2.6%).
The company sees more room for expansion ahead. The REIT expects strong demand for warehouse space to drive 7.5% to 8.5% annual net operating income growth across its existing portfolio over the next few years. Add in value-creating development projects, and its core FFO per share should rise by 9% to 11% annually through 2026. It could grow even faster if it makes acquisitions. That positions the REIT to deliver double-digit total annual returns with additional upside potential if its valuation multiple expands following its rate-driven contraction.
A rapid grower trading at a big discount
Extra Space Storage has been another top-five performer among REITs over the past decade. The self-storage REIT has grown a $1,000 investment into over $4,200 during the last 10 years. Powering those returns is the rapid growth in its core FFO per share (695% since 2011) and dividend (548% over the last decade).
Investors can currently buy this magnificent value-creating REIT at a 40% discount to its peak price. That enables them to lock in a much higher dividend yield (4.6% at present).
Extra Space is in an excellent position to continue creating value for investors. The REIT recently closed its needle-moving merger with Life Storage, forming the largest self-storage operator in the country. The deal will boost its core FFO per share while enhancing its growth profile. The company also has the financial flexibility to continue expanding its property portfolio and growing its sector-leading third-party management platform.
Going off the beaten path has paid big dividends
Equity Lifestyle Properties has also been a top-five performer in the REIT sector over the past 10 years. That has enabled it to grow a $1,000 investment into more than $4,200 during that period. The residential REIT has expanded at an above-average rate by focusing on investments off the beaten path, like manufactured housing, RV parks, and marinas. It increased its normalized FFO per share at a 9% compound annual rate from 2006 to 2022 while boosting its dividend at a 21% compound annual rate during that period.
The high-performing REIT currently sells for around 25% below its recent peak price. That enables investors to lock in a higher dividend yield (about 2.9% presently).
Equity Lifestyle should continue growing at an above-average rate. Demand for manufactured housing is strong due to the high cost of single-family homes. Meanwhile, demand for experiences like camping and boating is rising as more people retire or take the time to enjoy the great outdoors. Those factors are driving healthy growth rates at its existing properties. Meanwhile, the REIT has a strong balance sheet, giving it the financial flexibility to expand its portfolio by making acquisitions and investing in expansion projects.
These top-notch REITs are on sale
Prologis, Extra Space Storage, and Equity Lifestyle have a knack for creating shareholder value. They were three of the five best-performing REITs over the past 10 years. However, they currently trade at steep discounts to their peak prices due to the rise in interest rates. With interest rates expected to fall and these REITs continuing to grow their earnings and dividends, they should create significant value for their shareholders in the future. That makes them look like no-brainer buys right now.
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Matt DiLallo has positions in Prologis. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.
