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Motley Fool Issues Rare “All In” Buy Alert
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Given the multitude of different stocks available to invest in, it can be overwhelming to know where to start as a new investor. Growth stocks can be huge moneymakers over the long term, but they also carry a lot of risk.
A much safer starting point for new investors is investing in companies with somewhat boring but reliable businesses that have a proven track record of growth and income opportunities. Precisely what real estate investment trusts (REITs) offer.
These special types of stocks, which invest in real estate and real estate securities, offer exposure to a diverse industry while being managed by a professional team. Plus, because REITs are required to pay 90% of taxable income in the form of dividends, they can be extremely reliable passive-income streams.
Let’s look at the REITS that three Motley Fool contributors feel are their top recommendations for new investors: MAA (MAA -0.41%), previously known as Mid-America Apartment Communities; Gladstone Land (LAND -5.66%), and American Tower (AMT -1.70%).
Kristi Waterworth (MAA): If I had only one stock I could recommend to a new investor, it would be MAA. Not only has this REIT demonstrated steady revenue growth since 2000, it has also shown steady dividend growth since going public in 1994. Slow and steady might not be super sexy, but as far as investments go, it’s a sign of a REIT you don’t really have to worry about.
In the short term, MAA is filling a much-needed gap in housing, where an estimated 600,000-unit shortfall persists. Texas, Florida, and California are particularly hard hit by shortages, both current and projected, with these three states alone accounting for 40% of the projected future need (a total of 1.5 million new units by 2035), according to the National Multifamily Housing Council.
And MAA has significant holdings in both Texas and Florida, which make up just over 40% of its multifamily portfolio. That’s a total of over 37,000 units in these hot areas that are only predicted to be more in-demand over time. It also owns units in 15 other states, as well as a 22-acre parcel of land in Texas that’s ripe for development.
MAA’s liabilities of just over $5 billion are offset by assets of more than $11 billion, giving it plenty of room for big investments, as well as a buffer should there be some kind of sudden upheaval in the apartment sector.
Part of what is really fantastic about this REIT is that it doesn’t simply buy apartments and rent them out, it also spends money to create value in both existing and new acquisitions. It has finished refurbishing 2,942 units so far in 2022, at a cost of $5,364 per unit, but expects to increase the effective monthly rent $142 for each one over the longer term. Even without a yearly rent increase, it would only take 3.14 years for each of those units to break even on those big upgrades.
The stock has a 3.13% forward yield. Because MAA treats its apartments as long-term assets, and reinvests in units that many other landlords might sell off at a discount, it’s a steady earner over the long haul, and a stock you should never have to worry about as long as you hold it.
Mike Price (Gladstone Land): The key to good investing is the ability to hold for the long run. The internet is full of stories of investors who bought life-changing stocks and sold on the first dip, missing out on years of strong returns.
One of the ways to improve your ability to hold for the long run is by using diversification. Investing in stocks that aren’t correlated with one another is a good way to make sure that your entire portfolio falls only in very rare instances and likely for only short periods. More often, one of your stocks might fall while the others — because they’re affected by different economic forces — are going up.
Gladstone Land is a perfect stock for diversification as a farmland REIT, and it currently has a 2.6% dividend yield.
It owns 115,000 total acres of farmland across 169 different farms. These farms have triple-net leases, meaning the farmers pay for rent, maintenance, property taxes, and insurance.
Farmland is an attractive investment because it is generally not correlated to stocks. The forces that create the business cycle usually don’t directly apply to farmland.
It’s also beneficial in times of inflation. When prices are rising, food prices will keep up. Consumers might adjust their budgets to stop buying other things, but they have to buy food. Gladstone takes advantage of this with planned contract escalations and participation features in its leases: If the farmers make windfall profits because prices are going up, Gladstone’s rents will go up.
Its history as a public company hasn’t been as straightforward as the logic behind investing in farmland might make it seem. The stock basically went nowhere from its initial public offering in 2014 to 2021, when inflation fears helped it shoot up from around $15 per share to over $40. It has since fallen back to earth, along with the rest of the real estate industry, and sits at about $20 today. Investors did earn more than they would have in a savings account from dividends from 2014 to 2020, but be prepared for holding periods when the stock doesn’t do much — it will reward you when crises happen.
Liz Brumer-Smith (American Tower): There are lots of reasons American Tower is the perfect starter stock. The company has been in business for close to three decades. It has an outstanding track record, delivering a 12% annualized return for the past 25 years, which outperformed the S&P 500. And it has raised its dividend 42 times over the last 11 years.
It’s wild success over the years is thanks to the company’s business model. Specializing in communications infrastructure, American Tower owns and leases over 220,000 communication assets in 25 countries. It leases things like antennas, cellphone towers, and data centers to some of the largest communications companies, like AT&T, T-Mobile, and Verizon.
The communication infrastructure industry has changed tremendously over the past 30 years. The widespread adoption of cellphones, then smartphones, and now 5G has allowed the company to consistently grow. Its latest earnings report saw revenue increase by 17% year over year, while its adjusted funds from operations (AFFO), a key metric for REITs that works similarly to earnings per share, rose by 7%.
But it’s not just recent performance that makes this stock so appealing; 10 to 20 years from now, there’s a very good chance people will still be talking, texting, and browsing on their mobile phones or the internet. Given the essential nature of its business, its highly unlikely American Tower will be rendered obsolete. It has ample liquidity to cover its debt obligations and dividends, even if business were to slow suddenly.
The reliability of its business model and its title as the largest REIT by market capitalization does mean the stock trades at a slight premium, around 24 times its projected AFFO for the full year 2022. Its yield also isn’t huge at 2.3%. But for the security it offers and the potential growth opportunities when held long term, it’s still a fantastic starter stock.
Kristi Waterworth has positions in Mid-America Apartment. Liz Brumer-Smith has positions in American Tower and Mid-America Apartment. Mike Price has positions in Gladstone Land and has the following options: short October 2022 $25 calls on Gladstone Land. The Motley Fool has positions in and recommends American Tower, Gladstone Land, and Mid-America Apartment. The Motley Fool has a disclosure policy.
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