Being large isn't always a benefit for a company, since being too big can lead to inefficiencies and management distraction. However, for real estate investment trusts (REITs) Realty Income (O -0.77%), AvalonBay (AVB -0.95%), and Prologis (PLD -1.54%), size is a huge differentiator. Here's why this trio of monster-sized dividend stocks is worth buying and holding for a very long time.
1. Cost matters
Realty Income is the largest net-lease REIT you can buy, with more than 11,000 properties. "Net lease" means that the REIT owns the properties but the tenants are responsible for most of the operating costs of the real estate they occupy. With a large portfolio like the one Realty Income owns, it is a pretty low-risk business. However, cost of capital and access to deal flow are both key differentiating factors.
Realty Income's size means that any big acquisition opportunities out there are likely to pass across its deal desk. Moreover, its scale means it can absorb deals that smaller peers simply couldn't manage. And, here's the really big one, it has an investment-grade-rated balance sheet and the stock is generally afforded a premium relative to peers, at least partly because of the size of the business. That means that Realty Income can more easily find profitable deals with high-quality tenants because it has a low cost of capital. This helps create something of a virtuous cycle as these positives compound over time.
With a 4% dividend yield and Dividend Aristocrat status, Realty Income is a solid choice for conservative income investors.
2. Hot properties in hot markets
AvalonBay is one of the largest apartment landlords in the U.S. It owns a portfolio of about 300 properties across 12 states and the District of Columbia. Most of its properties are located in or around major cities, and the REIT focuses on keeping its portfolio modern and desirable. Because of its size, it has the wherewithal to grow via redevelopment, ground-up construction, and/or acquisitions.
That's important, because this flexibility allows AvalonBay to shift to whichever path is most financially rewarding at any given time. For example, today it has 17 properties under development, including expansion efforts, in currently hot markets like Denver, Texas, North Carolina, and Southeast Florida. Two properties are being redeveloped. For the time being, given the positive financial backdrop of the apartment REIT sector, AvalonBay isn't aggressively looking to acquire assets. But with a huge $4 billion development pipeline, it really doesn't need to. When the time's right to start getting acquisitive, though, this apartment giant will shift gears like it has before.
AvalonBay's yield is about 3% today, and the quarterly payment has trended steadily higher over time, though it hasn't been increased every year. Still, for long-term investors this growth-oriented REIT has what it takes to keep expanding in virtually any market.
3. There's nothing there...yet
Prologis is a massive industrial REIT with roughly 1 billion square feet of space spread across key distribution hubs on four continents. Warehouses are not sexy assets, but they are vital to the global flow of goods, and Prologis is the industry's 800 lb. gorilla with a $99 billion market cap (it's bigger than Realty Income and AvalonBay combined). Clearly this giant can easily make acquisitions without skipping a beat. (It is in the middle of trying to acquire peer Duke Realty in a deal valued at about $26 billion.)
But there's another factor here which should draw just as much attention from investors. Prologis has nearly 11,000 acres of well-located land on which it can build new warehouses. It estimates that this translates into about $31 billion worth of properties. That's roughly 30% of the company's current market cap, suggesting there's a huge future here even if Prologis never buys another asset again. Management estimates that it has been able to create returns of as much as 25% with past construction, hinting at solid upside for all of the REIT's vacant land.
Prologis's dividend yield is 2.4%, which seems low, but it has grown at a 10% clip on average over the past decade. If you are a growth-minded income investor, Prologis could be a great name to "set and forget."
Nothing is perfect
Realty Income, AvalonBay, and Prologis are all large, well-run REITs that derive material advantages from their scale. However, no investment comes without a few warts. For all three names here, there is one issue in common -- investors know how good the companies are, and they often trade at premium valuations. Prologis and AvalonBay are both down between 15% and 20% so far in 2022, so they are notably cheaper than they have been of late. Realty Income is actually up slightly, but it is a high-quality name for which paying full price is probably worth it if you are a conservative income investor.
