Real estate investment trusts (REITs) rebounded from a marginal April to set the pace for investments across the board in May. REITs outpaced the broader equity markets as they have been doing for much of the year.
Analysts attribute the recent success of REITs to positive near-term fundamentals and the influx of capital into the sector. According to REIT.com, the FTSE/NAREIT All REIT Index had a May return of 2.3%, while the S&P 500 Index gained 1.8%. For the year to May 31, the FTSE/NAREIT All REIT Index return was 6.5%, while the S&P 500 Index posted a 3.6% return.
Many industry pundits share the same sentiment towards REITs going forward: Fundamentals supporting the REIT sector should remain strong for the remainder of 2016, and cap rates should increase, albeit modestly.
They are enthused about the formation of a real estate sector on the S&P 500 in September that should increase REITs's exposure. Mutual fund managers will likely infuse fresh capital into the newly developed sector as they look to diversify.
Investors will have a number of attractive options. But one company that stands out is Digital Realty Trust (DLR) - Get Report , a strong dividend stock. The company recently replaced Time Warner Cable on the S&P 500 and operates in a growing space. Organizations are relying increasingly on data to make decisions and operate more efficiently but may not have the budget or inclination to create onsite facilities.
According to data provided by Cisco, "Globally, IP traffic will grow three-fold from 2015 to 2020, a compound annual growth rate of 22%." The report also suggested "Internet traffic will grow 3.0-fold from 2015 to 2020, a compound annual growth rate of 25%."
"Globally, the average Internet user will generate 44.1 gigabytes of Internet traffic per month in 2020, up 134% from 18.9 gigabytes per month in 2015, a CAGR of 19%," said the report.
San Francisco-based Digital Realty uses a huge network of data servers in Europe, North America and the Pacific rim to store and help manage data for companies. The company finished Tuesday trading at nearly $105 a share. Over the past year, its price has increased an impressive 50% and its market capitalization has surpassed $14 billion. A number of industry experts have rated the company an "outperform" or "strong buy."
In addition, over the past decade, Digital Realty has tripled its dividend yields to shareholders. In each of those years, average returns never dipped below 19%. As such, it is a good play for investors looking to hedge against market volatility.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.