Real estate investment trusts can make excellent retirement investments, if you invest in the strongest REITs at fair or better prices. That's because REITs match the needs of retired investors: current income and inflation-adjusted (or better) growth.
REITs are legally required to pay out 90% or more of their income to investors. Nothing aligns shareholder interests and management interests like sharing income.
Today we'll look at three REITs that are high-quality businesses. The lowest yielding of them still has a dividend yield of 3.8%! All three have paid increasing dividends for years, and one has paid increasing dividends for more than 25 consecutive years, making it one of just 50 Dividend Aristocrats.
1. Welltower (HCN)
Welltower, formerly known as Health Care REIT, owns and operates health care-related properties such as senior housing, outpatient facilities and post-acute communities in the U.S., Canada and the U.K.
The company generates steady earnings, which it uses to acquire new properties and pay a hefty 4.6% dividend.
Rather than focus on earnings per share according to generally accepted accounting principles, the traditional metric used by analysts to value stocks, investors should steer their research toward a different figure when evaluating REITs. REITs usually report their results in terms of funds from operation, or FFO, which is a non-GAAP equivalent measure to earnings per share. Focusing on FFO provides a more accurate picture of a REIT's fundamentals.
On this basis, Welltower is in great shape. FFO grew 8% last quarter to $1.12 per share, which set a record for the company. For the full year, the company expects 5%-6% FFO growth versus the previous year.
It also has a strong tenant portfolio. Welltower enjoys occupancy rates of 85% or higher across its portfolio.
The reason why Welltower, as well as the next REIT on this list, are attractive investments is because they are positioned very well to benefit from a structural tailwind for many years: the aging U.S. population.
According to a Gallup study conducted last year, the baby boomer generation alone constitutes about one-third of the U.S. adult population. There are millions of people entering retirement every year, and as the general population ages, it will result in much higher demand for health care.
For that reason, demographics heavily favor health care REITs.