Venturing into the realm of real estate investment trusts (REITs) is akin to navigating a bustling bazaar of opportunities, brimming with the allure of passive income beckoning in the distance. The distinct appeal of REITs lies in their ability to offer a gateway to income-generating real estate investments without the hefty upfront capital demands.
One defining quality of these REITs is their penchant for outshining the broader market indices. Over the course of the last quarter-century, REITs have displayed an impressive track record, boasting an average annual return of 11.4% – a stark contrast to the S&P 500‘s comparatively feeble 7.6% yearly total return in the same timeframe.
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The secret potion behind the superior performance of REITs lies in their dividends. Mandated by IRS rules to channel a hefty 90% of taxable net income back to investors through dividends, these stocks hold a special allure for income-seeking investors. Insights from Ned Davis Research and Hartford Funds reveal that dividend-paying companies outpace the S&P 500 with fewer jitters, magnifying their appeal for investors on the lookout for steady returns.
While REITs, in general, have trailed the S&P 500 in the past decade, certain subgroups are standing tall, outperforming the broader market and delivering value to investors. Here are three juggernaut REIT stocks that have eclipsed the S&P 500 over the last decade.
The Rise of Digital Realty Trust
Digital Realty Trust (NYSE: DLR) commands a commanding presence, boasting ownership of 309 data centers across 28 countries. Specializing in co-location, interconnection, cloud services, and other tech solutions, the company invests in gateway data centers strategically nestled in the heart of major urban hubs.
The unabated digital transformation of the economy has positioned data-center properties in a golden glow in recent years. The explosion of data has called for a surge in cloud solutions and other IT essentials, prompting tech bigwigs like IBM, Oracle, Meta Platforms, JPMorgan Chase, and Verizon to turn to Digital Realty for its top-notch data facilities.
Over the past decade, Digital Realty’s funds from operations (FFO) have surged by a staggering 278%, translating to a compounded annual growth rate of 14.2%. The stock’s total return, including reinvested dividends, soared to 332%, eclipsing the S&P 500’s somewhat lackluster 240% return during the same period.
The future appears equally bright, with projections from McKinsey & Company painting a rosy picture of a 10% annual growth in demand for data centers up to 2030. Digital Realty stands poised to ride this long-term momentum to greater heights.
Extra Space Storage: Self-Storage, Supreme Returns
Extra Space Storage (NYSE: EXR) takes the crown as the largest self-storage management company in the U.S., with 2,377 strategically placed locations. Predominantly deriving over 87% of its revenue from rent, the company provides sough-after storage facilities in high-density urban areas.
Self-storage properties have emerged as hot favorites among residential consumers seeking storage space for their surplus belongings and businesses in need of warehouse space for excess inventory, documents, and supplies.
Bolstered by their cost-effective nature, these properties have proven to be golden geese, enabling Extra Space Storage to witness a phenomenal surge in FFO by 374% over the past decade, demonstrating a compounded annual growth rate of 16.4%. Additionally, the total return amassed by the company – nearly 400% – towered over the S&P 500’s returns during the same period.
According to CBRE Group, the U.S.’s premier commercial real estate enterprise, the market for self-storage facilities remains robust. Factors like supply chain disruptions, escalating construction expenses, and soaring interest rates have acted as a bulwark against over-zealous developments in the sector, providing a favorable landscape for players like Extra Space Storage.
The Dominance of Prologis in Logistics
Boasting a gargantuan 1.2 billion square feet of logistics space, Prologis (NYSE: PLD) zeroes in on facilities catering to business-to-business entities and online retail fulfillment centers, counting the likes of Amazon, Home Depot, FedEx, and UPS among its clientele.
The seismic shift towards e-commerce and online retail has been a boon for Prologis. Post-pandemic, online merchants are doubling down on building resilient supply chains, leading to a surge in demand for warehousing, storage, and distribution spaces.
Over the past decade, Prologis witnessed an astronomical 495% growth in FFO, denoting a compounded annual growth rate of 19.5%. Couple this with a 93% increase in dividend payouts and a total return of 366%, towering over the S&P 500’s performance in the corresponding period. Recent tailwinds have seen Prologis capitalize on a resilient market and hike rents, with occupancy rates comfortably hovering above 97% and a steep 85% rise in rents from 2019 to 2023.
Caution is advised, though, as a surge in the supply of logistics spaces threatens to hit the market. In the wake of strong demand and low interest rates, developers went into overdrive a few years back, resulting in an influx of new facilities hitting the market in 2024. This may put a damper on rent growth for the REIT in the interim.
Prologis’s management remains upbeat, projecting a demand outstripping supply and eyeing a 4-6% rent boost in the coming years, thereby propelling core FFO growth by 9-11%. Furthermore, the burgeoning e-commerce trends are foreseen to hold fort for the foreseeable future, with the warehousing and storage services market slated to expand by a stout 7.7% per annum up to 2030.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, FedEx, Home Depot, JPMorgan Chase, Meta Platforms, Oracle, and Prologis. The Motley Fool recommends Extra Space Storage, International Business Machines, United Parcel Service, and Verizon Communications and recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
