Real estate investment trusts (REITs) are a popular way for investors to own income-generating real estate without having to purchase or manage property. Many investors like REITs for the income distributions. Unlike traditional corporations, REITs must invest in real estate and distribute 90% of their taxable income.

Compared to private real estate investments, public investments in equity REITs are more liquid, have a lower minimum investment, have more limited liability (and therefore less risk), offer the same protections as publicly traded securities, provide easy access to active professional management and require less hands-on work.

There are a couple of notable investment characteristics that you can expect REITs to bring to your portfolio, such as relatively high yields, stable earnings and income (due to the long-term contractual nature of many leases and rental agreements), capital appreciation and diversification (historically, REITs have had a low correlation with other assets).

We can construct a universe of equity REITs to invest in using AAII’s Stock Investor Pro. The fundamental stock screening and research database program contains a field under the Company Information category labeled “Industry.” From it, we choose commercial, diversified, residential and specialized REITs. By simply requiring stocks to be exchange-listed, have a stock price above $4 and have a current yield greater than the market yield of 1.2%, we start to build our universe of equity REIT stocks.

The key cash flow and profitability measures for analyzing an equity REIT are net operating income (NOI), which measures the net cash generated by an income-producing property, and funds from operations (FFO), which measures cash flow from operations to assess a REIT’s operating performance. AAII’s Stock Investor Pro tracks traditional valuation metrics like the price-earnings ratio and the price-to-free-cash-flow ratio, but net income and earnings per share don’t translate well to REITs. The AAII database does not include NOI or FFO, so many REIT-specific valuation metrics can’t be calculated.

The next step is to narrow this list down to an investable universe. We chose to focus on a growth-oriented strategy. Specifically, we required stocks to have realized annual revenue growth greater than 3% over the past five years. This narrows the results to REITs that have been able to increase annual rent rates or occupancy levels. We then require high-quality, dividend-paying companies that have continuously grown their dividends for at least three consecutive years. A minimum dividend growth rate over the past five years of 5% was also chosen to ensure that the REITs have growth in excess of the rate of inflation. The list of First Cut equity REIT stocks are shown in the table.

10 REITs With Growing Dividends and Sales
(Ranked by Dividend Yield)

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