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Debt Trap or Dividend Dream? 3 REITs Navigating the Rising Rate Maze

The window of opportunity is closing for investors to capitalize on the cheap valuations of real estate investment trusts (REITs) before the Fed cuts interest rates. Despite inflation spiking in December, institutions like Goldman Sachs (NYSE:GS) predict that there will be five rate cuts this year, with the first one beginning in March. This backdrop has led to this list of REITs to watch.

Buying shares of the REITs confers many advantages to investors. These include greater capital appreciation potential, as well as a lower cost basis, which can boost one’s effective yield. Even for young investors who are aggressively pursuing growth, holding these REITs for long periods may improve risk-adjusted returns, as well as lay the beginning foundations for a more conservative portfolio in their twilight years.

The REITs to watch in this article have great dividend yields as well as strong dividend growth potential, which, when combined with many decades can lead to strong compounding returns.

So here are the best REITs to watch for January as we witness the predicted fall of rates in the U.S. as well as abroad.

Alexandria Real Estate Equities (ARE)

Source: Mongkolchon Akesin /

Alexandria Real Estate Equities (NYSE:ARE) is a life science REIT that develops and manages properties in key locations like Boston and New York City. Some of its tenants include biotech companies and pharmaceutical businesses.

ARE has a strong occupancy rate and is supported by several positive metrics. Its forward dividend yield of 4.02% is well-supported by its free cash flow, and its revenues have increased every financial year since 2018.

Furthermore, the nature of its tenants being in the scientific industry may also give its financials some more stability over other types of REITs such as the residential housing market or industrials, which are known to be cyclical. Its very nature and composition of ‘blue-chip’ tenants afford investors extra protection.

Despite its yield being lower compared to some of its peers, ARE’s five-year dividend growth rate of 5.87% is substantial. And a 13-year track record for dividend hikes may give some confidence this growth will continue.

ARE is a good pick for younger investors who value growth over immediate income, thus making it one of those REITs to watch.

Mid-America Apartment Communities (MAA)

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Mid-America Apartment Communities (NYSE:MAA) specializes in multifamily communities primarily located in the Sunbelt region, which includes states that stretch from California to North Carolina.

Unlike other REITs that struggled under the backdrop of higher rates, MAA has managed to keep its occupancy rate high and cash flow coming in. The negative backdrop has managed to separate the wheat from the chaff, which gives extra confidence to invest in REITs like MAA despite being in a cyclical industry.

This REIT’s dividend yield is 4.39% on a forward basis and beats many of its similar peers in terms of revenue growth for both historical measures and future projections.

Part of the reason I’m bullish on MAA is that its share price has dropped around 16% for the past year despite funds from operations (FFO) and its top line experiencing solid growth. To me, this indicates that there’s an opportunity for its shares to revert closer to its long-term mean price and that it is presently undervalued, thus making it one of those REITs to watch.

Realty Income Corporation (O)

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No list of REITs to watch would be complete without a mention of Realty Income (NYSE:O). As one of the most discussed REITs on the market, it deserves a special place.

Like most quality REITs on the market today, I also believe O’s stock price to be undervalued, and Wall Street agrees. The consensus analyst consensus rating for the company is “Buy,” and it has a modest upside of around 5% for its share that is expected to be realized within the next twelve months.

Analysts are expecting O’s topline to surge 19.97% for FY2024, along with a bump of 9.03% to its EPS, which would increase it to 1.44.

Its dividend increase streak of 26 years and a healthy payout ratio of 73.97% solidifies the bull case. However, this is more for investors who have a longer time horizon versus those who need immediate income due to its dividend yield hovering at around 5%.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the Publishing Guidelines

Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.