Real estate investing can be a great way to generate passive income. However, recurring cash flow is only part of the return. The other side is price appreciation, as the value of the underlying real estate rises.
Real estate investment trusts (REITs) make it easy for anyone to participate in the wealth creation of real estate. Several have produced monster total returns over the past decade, driven partly by their growing dividends. Here's a closer look at five of the sector's best performers.
A coastal focus has paid dividends
Terreno Realty (TRNO -0.94%) has delivered a total return of almost 300% over the last 10 years (nearly 15% annualized), which has easily beaten the broader market (the S&P 500's total return is around 200% and 12% annualized). The industrial REIT has a very focused strategy of acquiring warehouses in six major coastal markets. That has enabled it to benefit from tight market conditions to capture above-average rent growth.
Terreno's average cash same-store net operating income has grown at an 11.2% annual rate since its initial public offering. That's enabled it to expand its dividend at a 12.2% compound annual rate since initiating a payout in 2011.
Going off the beaten path has paid dividends
Equity LifeStyle (ELS -0.51%) has delivered a 300% total return over the past decade (15% annualized). The residential REIT focuses on lifestyle properties like manufactured home communities, RV resorts, and marinas and has grown rapidly over the years.
It has increased its normalized funds from operations (FFO) per share at a 9% compound annual rate since 2006, while growing the dividend at a 21% compound annual pace during that time frame. It has benefited from the extremely durable and above-average rent growth of manufactured home communities and the steady expansion of its portfolio.
A data-powered dividend
Equinix (EQIX -0.60%) has produced a roughly 315% total return over the last 10 years (more than 15% annualized). The key to Equinix's success is its extremely steady growth. The data center REIT's revenue has risen for 80 straight quarters, which it says is the longest streak in the S&P 500.
The company's steady revenue growth has increased its cash flow, enabling it to raise its dividend. Equinix has grown its payout for eight-straight years since converting to a REIT in 2015, including by 10% earlier this year.
The best performers are getting better
Self-storage REITs Life Storage (LSI) and Extra Space Storage (EXR -1.01%) round out the top five performing REITs, delivering total returns of around 325% and over 375%, respectively. The two best-performing REITs recently agreed to join forces to create a sector leader.
The companies have benefited from the strength of the self-storage sector, which has consistently delivered leading total returns among REITs and has been the No. 1 cumulative total return producer since 1999. The industry benefits from durable and growing demand, which enables operators to raise rents and expand their portfolios.
This has driven robust FFO per-share growth for Extra Space and Life Storage of 720% and 302%, respectively, since 2011. It has given both the funds to rapidly increase their dividends. Extra Space's payout has risen 548% over the last 10 years, while Life Storage's is up 275%.
Extra Space believes its acquisition of Life Storage will enable it to extract more value from the combined platform and benefit from several embedded growth drivers. That positions the company to potentially maintain its market-crushing ways.
REITs can be a great way to earn outsized returns
REITs can provide a lot more than dividend income. The best ones can also produce market-beating total returns as they grow their income and dividend payments.
That's evident from the success of these five top-performing REITs over the past 10 years. Because of that, investors should consider adding some REITs to their portfolios, even if they don't care about collecting dividend income.
