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Nearing Retirement? The 3 Best REIT Dividend Stocks to Buy Now

Investors who are nearing retirement have different objectives than younger investors. They need growth, but they also need stability and income. Real estate investment trusts (REITs) often provide steady income since they are required to distribute most of their earnings as dividends. This allows them to avoid paying income taxes at the corporate level, which increases earnings.

Here are three REITs that successfully navigated the economic craziness related to the COVID-19 pandemic without cutting their dividends. Companies that survived the pandemic with their business plans and their stock prices intact have stability that should appeal to income investors. 

Image source: Getty Images.

1. Realty Income

Realty Income (NYSE: O) is a highly defensive name with a business model that has proven profitable over the entire economic cycle. Realty Income develops single-tenant stand-alone properties and then leases them out to high-quality tenants using long-term leases. These tenants are responsible for almost all of the expenses of the properties and usually enter into lease terms of 7-10 years. The typical Realty Income tenant is a drug store, a dollar store, or convenience store. These types of retailers are less economically sensitive than the typical mall retailer. If the economy goes into a downturn, people will eschew designer clothing, but they will still buy prescription drugs and general consumables. 

Realty Income performed well during the COVID-19 pandemic. While most REITs were forced to cut their dividends to conserve cash, Realty Income hiked its dividend three times in 2020. The company’s long track record of dividend increases has earned it a place as a Dividend Aristocrat. At current levels, the stock yields 4.3% and should be a core holding of an income investor’s portfolio. 

2. Alexandria Real Estate Equities

Alexandria Real Estate Equities (NYSE: ARE) is an office REIT that specializes in the life sciences sector. The life sciences sector has different requirements than the typical office tenant, and Alexandria was the first mover in this sector. The life sciences laboratory space has high barriers to entry (not just anyone can comply with the multitude of regulations and requirements), as well as high barriers to exit. This client stickiness gives Alexandria an advantage over more conventional office REITs. 

While many office REITs struggled mightily during the pandemic, Alexandria (via its tenants) benefited from additional government spending on research and development. Alexandria was able to hike its dividend twice in 2020, while many REITs were cutting theirs. With a tenant base focused on life sciences, Alexandria is more insulated from the economic cycle than most companies. At current levels, Alexandria has a dividend yield near 3%, and the dividend is well-covered by funds from operations (FFO), which is the way REITs measure income. 

3. Equity Residential

Equity Residential (NYSE: EQR) is another REIT that specializes in rentals for upscale urban professionals in the most desirable markets. Equity Residential focuses on markets that are characterized by a large number of jobs in knowledge industries, along with high single-family house prices and a tight labor market. According to the FHFA House Price Index, home prices are rising at an 18.7% clip, which is rapidly making it difficult for young first-time homebuyers to afford properties. In addition, mortgage rates have moved up dramatically this year, exacerbating the problem. 

This decline in affordability provides a wind at Equity Residential’s back. Equity Residential was forced to “buy occupancy” during the COVID-19 pandemic, which meant it made rental concessions in the form of lowering rents and offering free months and additional amenities. This depressed earnings during 2021, but these new leases are resetting to market levels, which will drive earnings going forward. Equity Residential has a dividend yield of 3.3%, and it has been able to navigate the pandemic without cutting its dividend. 

Brent Nyitray, CFA, has no positions in the stocks mentioned. The Motley Fool recommends Alexandria Real Estate Equities. The Motley Fool has a disclosure policy.

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