When investors think of real estate investment trusts, or REITs, they probably think of dividend stocks with high yields. There is good reason for this, as many REITs have significantly higher yields than the market average. It is not uncommon to find yields of 5% or more among them.
The downside of high-yield stocks is that often, investors have to accept a lower rate of dividend growth along with these higher yields. The highest-yielding REITs can also be risky, as abnormally high yields can be a sign of deteriorating fundamentals — and the possibility of a future dividend cut.
But there are also REITs that appeal to growth investors. For those with a longer investing time horizon, stocks with higher dividend growth could generate greater income in the long run, even at a lower starting yield.
The following three real estate investment trusts are high-quality companies with excellent growth prospects. While they have lower yields than investors might be accustomed to from REITs, they more than make up for it with high dividend growth along with dividend safety.
- Digital Realty (NYSE:DLR)
- Crown Castle International (NYSE:CCI)
- Innovative Industrial Properties (NYSE:IIPR)
High Growth REITs: Digital Realty (DLR)
Dividend Yield: 3.1%
Digital Realty is a growth REIT, because it has benefited from the boom in big data. That’s because Digital Realty owns data centers. It has a large and diversified portfolio which includes 4,000 global customers, and over 280 data centers. These properties house servers and network equipment.
This is a very advantageous market to be in right now. The boom in internet cloud services has created rising demand for data. Digital Realty has a high-quality tenant portfolio, with Facebook (NASDAQ:FB), Microsoft’s (NASDAQ:MSFT) LinkedIn, Oracle (NYSE:ORCL), and International Business Machines (NYSE:IBM) among its top-10 tenants by percentage of annualized rental revenue.
Digital Realty performed well to start 2020. In the third quarter, the company grew revenue by 3% quarter-over-quarter. On a year-over-year basis, revenue rose 27% thanks in large part to the $8.4 billion Interxion acquisition in 2019.
High demand for data centers gives Digital Realty an attractive business model. It has a weighted average lease term of nearly five years, and the company enjoys annual rental increases of 2%-4%. Consequently, Digital Realty has enjoyed strong growth over the past several years. The company nearly doubled its operating revenue from 2015-2019. Looking further back, core funds from operation (FFO) increased by 12% annually from 2005-2019.
In turn, shareholders of Digital Realty have benefited from excellent returns through a rising share price, as well as high dividend growth. The company has increased its dividend for 14 years in a row, and it routinely increases the dividend at a high rate. From 2005-2020, the company increased its dividend by a compound annual growth rate of 11%. The current yield of 3.1% is still quite appealing for income investors, with interest rates near historic lows.
Crown Castle International (CCI)
Dividend Yield: 3.3%
Crown Castle International provides shared communications infrastructure. The REIT owns a large property portfolio which consists of over 40,000 cell towers, approximately 70,000 small cell nodes, and roughly 80,000 route miles of fiber. This is an attractive market for investment, as strong demand for data usage over the past several years provides Crown Castle with consistent growth.
According to a recent company presentation, mobile data usage in the United States has increased 96-fold since 2010.
Crown Castle’s growth has continued unabated in 2020, even under difficult business conditions due to the coronavirus pandemic. In the 2020 third quarter, site rental revenue increased 4% year-over-year, leading to 6% growth in adjusted funds from operation (AFFO). Growth was due primarily to new leasing activity, as well as contracted rent escalators, which more than offset modest tenant non-renewals. The company expects 2021 to be another year of growth, with management forecasts calling for 10% growth in AFFO.
Crown Castle currently pays an annualized dividend of $5.32 per share, representing a yield of 3.3% right now. This is a highly appealing dividend yield, with the added bonus of strong dividend growth. The company raised its dividend by 11% in October 2020, and management maintains a long-term dividend growth rate of 7%-8% per year. This is a realistic dividend growth rate, as the growth in wireless and Internet activity is far from over.
Plus, demand for these services tends to hold up even in economic downturns, which will allow the company to maintain its dividend in a recession.
Innovative Industrial Properties (IIPR)
Dividend Yield: 2.5%
Innovative Industrial Properties gives investors exposure to another high-growth industry — marijuana. The company provides real estate capital to medical-use marijuana producers. Its portfolio consists of properties used for cultivation, processing and retail. The portfolio includes more than 60 properties in 16 states. IIPR enjoys excellent portfolio metrics, with an average lease length of over 16 years and over 99% occupancy.
Interestingly, the ongoing legalization and growth of the marijuana industry has been good for real estate prices in the areas in which legalization has advanced. Home prices in particular have benefited from marijuana legalization.
IIPR was founded in 2016, but it has already generated impressive growth. In 2017 (its first full year of operation) the company generated adjusted funds from operation (AFFO) of $0.67 per share. In 2019, diluted AFFO reached $3.27 per share. Growth continued in 2020, even with the coronavirus pandemic severely impacting the U.S. economy.
In the 2020 third quarter, revenue increased 197% from the same quarter the year before — nearly tripling on a year over year basis, which is highly impressive growth. AFFO-per-share increased 48% for the quarter. Growth came primarily from property acquisitions, as well as rental increases on existing properties. IIPR had 100% rent collection in the third quarter.
Not surprisingly, shareholders have benefited from this growth through capital appreciation and rapidly growing dividends. The company increased its dividend three separate times in 2020. In total, dividends paid the last four quarters equaled $4.47 per share, representing 58% growth from dividends paid of $2.83 per share in 2019. The most recent quarterly dividend of $1.24 per share represents an annualized forward payout of $4.96, for a forward dividend yield of 2.5%.
IIPR is a lower-yielding stock than investors might be accustomed to from REITs, but it still provides a higher yield than the S&P 500 average yield of 1.5%. And with such a high rate of growth due to the booming medical marijuana industry, investors are likely to generate much higher dividends down the road.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.