How to Find the Best REIT Stocks

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last updated 28 November 2023

Investors looking to diversify their portfolios beyond traditional stocks and bonds sometimes turn to real estate investment trusts, or REITs. But why invest in REIT stocks and how do you find the best ones?

While real estate doesn't provide as high of annual returns as the stock market on average, it also tends to be less volatile and can be a hedge against inflation since property values and rents rise with the Consumer Price Index (CPI).

Real estate investments also frequently pay dividends, which can counterbalance rising costs of living.

But real estate can also be costly and time consuming to invest in if you try to buy property outright. Enter REITs, which trade like stocks.

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What are REIT stocks?

REITs are companies that own and/or manage income-producing real estate, like apartment complexes or shopping malls.

"REITs can be publicly traded on one of the exchanges or privately owned that accept investments from private investors or individuals," says Daniel J. Laginess, a certified public accountant and investment advisor representative and managing partner at Creative Financial Solutions in Southfield, Michigan. Privately owned REITs are also known as non-traded REITs.

Publicly traded REITs must pay out at least 90% of the taxable income they earn from these properties to investors, which can translate to high yields for REIT stockholders. REIT dividends grew faster than inflation in all but three years between 2000 and 2020, according to data from Nareit.

"Privately owned REITs do not have that dividend requirement and they may only allow redemptions during a designated redemption period," Laginess says. "They may also suspend redemptions, normally due to adverse market conditions, which happened frequently during the financial crisis in 2008."

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Should you invest in REIT stocks?

When inflation is on the rise, the best REIT stocks can be an appealing place to invest thanks to their high yields, but rising interest rates can also be a detriment to returns.

"Rising interest rates can adversely affect many REITs due to the increased costs of purchasing and maintaining properties as well as the possibility of decreasing property values," Laginess says. "The Federal Reserve has drastically increased interest rates over the past two years which has negatively affected many properties due to the cost of borrowing."

If you're trying to diversify your portfolio, Edward Fernandez, president and CEO of 1031 Crowdfunding, a real estate investing platform, warns that publicly traded REIT stocks may not fit that bill.

"A (publicly) traded REIT belongs more in your equity portion of your allocation and is not investing in true real estate," he says. "REIT stocks are subject to the volatility of the equity market because the value of that stock is not directly tied to its real estate; it's tied to the company that owns the real estate and its performance."

Correlation, or the degree in which two assets move in tandem, is measured on a scale of -1 to 1 where 1 indicates perfect correlation. From January 2011 to December 31, 2022, REITs had a 0.73% correlation with the S&P 500. By comparison, commodities had a 0.42% correlation to the S&P 500 over the same time period.

If you want to diversify with REIT stocks, Fernandez says to look to non-traded REITs. These can usually be purchased through a financial advisor.

Non-traded REITs can be riskier than their publicly-traded counterparts, however, with lower liquidity and transparency plus higher up-front fees – usually 9% to 10%.

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How to find the best REIT stocks

REITs are often categorized by the type of real estate they invest in. For example, office space, retail real estate, residential properties or self-storage, among many others.

"It is very important to consider the investment objective of a REIT before investing," Laginess says. "During the COVID-19 pandemic, many employers had employees working from home and have now extended that policy leaving many office buildings unused or significantly oversized."

He says when seeking out the best stocks to buy in the real estate sector, consider REITs that invest in data centers, healthcare or self-storage properties instead, "as those industries appear to have been less affected by recent trends and financial conditions and have actually shown some growth."

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The best REIT Stocks

While there is no one-size-fits-all REIT that will work in every portfolio, the following are some of the more promising publicly traded REIT stocks to consider now.

Welltower (WELL) has been investing in healthcare providers for more than 40 years. It provides property to senior housing operators, post-acute care providers and health systems. It was named as one of the World's Most Admired Companies by Fortune Magazine in 2019.

It reported funds from operations – FFO, a key REIT earnings metric – of 92 cents per share in the third quarter of 2023 and recently revised its 2023 FFO outlook from $3.48 to $3.59 per diluted share to $3.51 to $3.60 per diluted share. It pays a dividend yield of 2.7%.

Digital Realty Trust (DLR) invests in data centers, colocation (centers where businesses rent space for data servers and other computer hardware) and interconnection solutions properties. It has more than 300 data centers across more than 50 metros and had $54 million in bookings in the third quarter of 2023 alone.

DLR pays a quarterly dividend with a current yield of 3.6%. The dividend has increased every year since 2005 with a compound annual growth rate (CAGR) of 10%.

Public Storage (PSA) is one of the largest self-storage facilities operators in the U.S. with more than 2,900 facilities across the nation. In addition to self-storage, it invests in business, car and RV, boat and climate-controlled storage.

PSA reported $3.2 billion in net operating income between third quarter 2022 and third quarter 2023. Its portfolio has expanded by 33% since it started operating in 2019. It yields 4.7% currently.

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Coryanne Hicks is an investing and personal finance journalist specializing in women and millennial investors. Previously, she was a fully licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions every day. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way. You can connect with her on Twitter, Instagram or her website, CoryanneHicks.com.