Two Perfect REITs for a Dovish Fed

07/01/2019 5:00 am EST

Focus: REITS

Tom Hutchinson

Editor, Cabot Dividend Investor

There are a lot of good REITs to buy in the current market environment. Not only do they offer a high degree of safety and income in an uncertain market, they should get a boost from the Fed's dovish stance on interest rates, asserts Tom Hutchinson, income expert and editor of Cabot Dividend Investor.

REITs also enjoy a special tax exemption provided they pay 90% of profits, after expenses, out to shareholders in the form of dividends. Here's two perfect real estate investment trusts to consider in a low interest rate environment.

STORE Capital (STOR) is an under-the-radar REIT operates in the retail space. That may seem like a bad idea right now. Aren’t brick and mortar retailers closing like crazy? Yes, but this well-run REIT is actually benefitting from the shifting retail environment. Let me explain.

STORE Capital’s properties tend to be located in the more popular, contemporary strip malls and city/mall combination spaces, not in the dying indoor malls. As well, STORE’s tenants are those that don’t compete with the internet. The largest property holdings are in desired experiences like restaurants, early childhood education centers, movie theaters, and health clubs. Such services are thriving.

The REIT also has a good formula for the current environment in that leasing saves the lessee money. They don’t have to shell out upfront cash and be in the real estate business. STORE capital primarily uses triple net leases, where the lessee pays all the expenses and maintenance.

The arrangement cuts down on unforeseen expenses and provides a more predictable cash flow. Most contracts are 15 years or longer and the REIT has a nearly 100% occupancy rate.

Performance has been stellar, as the REIT has consistently outperformed both its peers and the overall market. STOR is also a favorite of Warrent Buffett. As well, the stock has strong down market credentials as it barely budged during the December selloff. The stock pays a dividend of 3.7% and should continue to thrive.

Realty Income (O) is a different kind of pick; it is perhaps the most well-known REIT in the country. This REIT was one of the first on the market. It’s been around since 1994 and has returned an average of 16.9% per year since, blowing away the returns of its peers and the overall market.

This REIT has been such a great performer and reliable monthly dividend payer that is has the hubris to call itself “The Monthly Dividend Company.” It has paid dividends for 586 consecutive months and raised that dividend for 86 consecutive quarters at an average 4.6% annual rate.

It has primarily used the same formula as STOR with low expenses and predictable triple net lease agreements. The REIT portfolio is in 49 states with over 5,800 properties under long-term net lease agreements. It has 261 commercial tenants and 48 retail and other tenants. It currently pays a 3.8% dividend, and the payout will most certainly increase.

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