Perhaps one of the biggest misconceptions in dividend investing is that real estate investment trusts (REITs) are terrible investments during periods of rising rates.
The idea is that as a high-yielding security type, REITs will fall as the Fed increases rates and “safer” bonds yield more. However, that couldn’t be further from the truth.
While REITs suffer an initial setback in share prices, top-notch REITs are able to raise their rents faster than changes in inflation and interest rates. That produces better cash flows, overall higher dividends and continued capital appreciation for the REITs. The truth is, REITs are one of the best ways to beat inflation and profit from higher interest rates.
You just have to find the right REIT.
And, luckily, our Best Dividend Stocks List pick in the real estate sector is one of the best. The firm owns plenty of office and apartment buildings in key markets. These markets feature limited room to grow and high barriers to entry. This gives our pick near monopoly status when it comes to its buildings and provides it the ability to charge high and rising rents on its properties. Moreover, its business model of using shorter-than-industry-average lease agreements allows it to raise rents faster than competitors to take advantage of rising rates.
In the end, our pick continues to be a dividend champion and will deliver income as well as capital gains as the Fed raises rates.
To summarize, here are five reasons why you should own this stock:
- A focus on high barrier-to-entry office and apartment buildings – with a strong, affluent customer base.
- Rental agreements include yearly contractual increases of 3% to 5%. This provides a guaranteed boost to cash flows both in good and bad years.
- Since its IPO, it has almost doubled the return of the broader MSCI REIT Index.
- Adjusted funds from operation – which drives dividends – has surged nearly 150% per share since its IPO.
- Healthy payout ratio of 49% and forward yield of 2.60%.
Check out our original pick here.