3 Dividend Growth REITs To Buy And Hold

Real estate investment trusts, or REITs (VNQ), are commonly perceived to be boring income investments and, as a result, many think that they are only suitable for income investors.

But the reality is very different.

Yes, REITs pay a high yield, but real estate is a total return investment with growth and long-term appreciation forming a substantial portion of the returns.

If you look at past multi-decade time periods, you will find that REITs and real estate have commonly outperformed most sectors of the market (SPY), with the yield only representing a third of the total return in most cases:

The reason why REITs have been so rewarding over the long run is because they not only pay a high yield, but they also grow this dividend by hiking rents and acquiring additional properties.

In what follows, I am going to give you three great examples of dividend growth REITs for total return-oriented investors to consider for their portfolios:

NNN REIT, Inc. (NNN)

NNN is an easy pick for this list because it has a 34-year track record of steady dividend growth…

… And it has managed to earn 12%+ average annual total returns since going public until the recent bear market, massively outperforming the S&P 500 (SPY) and other indexes:

Today, the REIT is well positioned to keep on growing because:

• It owns service-oriented net lease properties such as Taco Bell (YUM) restaurants, and it earns steady rental income from 10+ year-long leases.

• Its leases enjoy ~2% annual rent escalations and its tenants are responsible for all property expenses, including even maintenance.

• It has a fortress BBB+ investment grade rating with low debt, long debt maturities, and access to significant capital.

• It retains about 40% of its cash flow to acquire additional properties and grow its cash flow.

All in all, this should result in ~5% annual growth over the long run, and that’s all it takes to reach double-digit total returns given that it trades today at a 5.5% dividend yield.

5% growth + 5.5% dividend yield = 10.5% total return

And it does not stop there.

Today, NNN is priced at one of the lowest valuation multiples in its history because REITs are currently out-of-favor. It currently trades at just 12x funds from operations, or FFO, down from closer to 20x FFO before the recent REIT bear market.

I expect its multiple to expand closer to 15-16x as interest rates begin to decline, and this should bring your total returns closer to 12-15% per year going forward.

That’s very attractive when you consider that it is coming from a defensive blue-chip REIT like NNN.

VICI Properties Inc. (VICI)

VICI is a newer REIT, and it is somewhat riskier than NNN, but it also enjoys faster growth prospects.

It is the biggest casino REIT in the world, owning some of the iconic assets on the Las Vegas strip, including the Caesars Palace (CZR), the MGM Grand (MGM), and the Venetian:

It went public in 2019, and it has been able to grow its dividend at a rapid pace, even despite the pandemic and the recent surge in interest rates. On average, it has grown its dividend by 7.6% annually, easily outperforming Realty Income (O) and others:

It has been able to grow so quickly because of two main reasons:

• Its leases are particularly strong. They have a 40+ year average lease term, and they include CPI-based rent adjustments, which result in faster growth during times of higher inflation. Its tenants are also responsible for all property expenses, including even the upkeep of the properties.

• The cap rates of the casino property sector have historically been on the high side because few investors were targeting these assets, and it allowed VICI to earn higher spreads over its cost of capital.

Last year again, the REIT grew its FFO per share by about 10%.

This year, its growth will be lowered because it will refinance a bunch of its debt at a higher interest rate, but even then, it still expects to grow its FFO per share by about 4%.

Just like NNN, VICI’s stock is today priced at a historically low valuation multiple of just 11.5x FFO and a near 6% dividend yield, and therefore, we think that it is likely to deliver double-digit total returns going forward.

The yield and the growth alone should get you to 10% total returns, and if you add a bit of upside to that, you should get closer to 15% annually as its multiple expands closer to 15x FFO.

Such returns may not seem realistic from a REIT, but they are actually in-line with what VICI has achieved in the past.

NewLake Capital Partners, Inc. (OTCQX:NLCP)

NLCP is typically not included in the lists of “dividend growth REITs” because it is such a high yielder.

Today, its dividend yield is about 9%.

But despite offering such a high yield, it has also managed to hike its dividend in nearly every quarter since going public:

And I think that this strong growth is set to continue because:

• It owns cannabis cultivation facilities in limited license states. This means that its assets are strictly limited in supply, but the consumption of cannabis is growing at a rapid pace.

• It enjoys 10+ year long leases with 2.7% annual rent escalations and its tenants are responsible for all property expenses.

• Today, the REIT has no debt, but it has secured a credit facility with a fixed 5.75% interest rate until 2027. This capital could be deployed into new acquisitions at a 12%+ cap rate, resulting in a massive spread over its cost of capital, significantly expanding its FFO per share.

• It retains about 20% of its cash flow to acquire additional properties and/or buy back shares.

This explains why the REIT recently hiked its dividend by another 2.6%, and I expect another similar hike later this year.

The REIT has surged lately, but I think that it will enjoy a lot more upside in the coming years as its growth accelerates and the market warms up about cannabis growth stocks.

Best of all, when you earn a 9% dividend yield, it does not take much growth to reach strong double-digit total returns.

Closing Note

NNN, VICI, and NLCP are three great examples of dividend growth REITs that should manage to deliver double-digit total returns going forward. They are the proof that REITs are not “just” boring income investments.

They pay a high yield, but they grow as well, and they should enjoy particularly strong total returns going forward because they are today priced at their lowest valuation in over a decade:

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.