Being in my early 40s, many people are surprised to see a relatively high concentration of real estate investment trusts (REITs) in my portfolio. After all, many consider REITs to be boring income investments.
However, REITs are not only excellent income stocks, but can also have serious upside potential over the long term. Through smart capital allocation, many REITs have done an excellent job of creating shareholder value over time and delivering market-beating total returns over the long term.
This is why I own REITs while I’m still over twenty years from retirement. My goal is to use these stocks to supplement my portfolio for decades to come, reinvesting all my dividends along the way so they can generate excellent income streams after I eventually retire.
With that in mind, here are two REITs in particular that could be smart additions to a long-term portfolio right now.
This “casino REIT” has enormous growth potential
Vici properties (NYSE:VICI) is best known as a gaming REIT, and for good reason. It originated as a spin-off of several of Caesars Entertainment‘S (NASDAQ: CZR) real estate assets, and has since acquired its biggest competitor and several other impressive gaming assets. It owns some of the Las Vegas Strip’s most iconic properties and much of the best regional gaming real estate in the US
However, this could be just a starting point, as Vici has recently begun to diversify into other types of entertainment and recreation properties. It acquired a portfolio of Bowlero entertainment centers and recently agreed to provide construction financing for a new Margaritaville Resort.
The key points about these types of properties (especially casinos) are that tenants tend to sign long leases with built-in annual rent increases, and vacancies are quite rare. Vici currently has a dividend yield of 5.8% that is more than covered by earnings, and already has a strong history of increasing the dividend over time.
A revenue machine with a proven track record
EPR properties (NYSE: EPR) is another REIT that specializes in experiential properties. It owns a portfolio of theaters, water parks, ski resorts, entertainment venues and more. While headwinds during the pandemic caused turbulence in the theater portfolio (including the bankruptcy of the second largest tenant), the situation has resolved favorably for EPR and the company is firing on all cylinders.
Like Vici, EPR’s tenants generally enter into long-term lease agreements with built-in rental growth. It aims to reduce its theater presence over time and expand the other parts of its portfolio, and already has relationships with excellent tenants including TopGolf and Vail Resorts (NYSE:MTN)just to name a few.
EPR recently increased its dividend and has an attractive yield of 8.1% at the current price. And not only does it generate enough cash flow to cover the dividend, but EPR actually has one of the lower payout ratios in the REIT sector.
While box office headwinds and rising interest rates have weighed on the stock, the long-term results show what a great company this is. Since its initial public offering in 1997, EPR Properties has generated a total return of 1,330% for investors, compared to a total return of 770% for the S&P500 during the same period.
How much retirement income can these provide?
Of course, there is no way to accurately predict the long-term performance of publicly traded companies, but we can certainly use their past performance as an indicator of their potential.
EPR has the longer history of the two, and its performance over its 27-year history translates into annualized returns of 10.4%. And this is included the recent underperformance in the environment of rising interest rates. Vici has only been public since 2017, but has since achieved an annualized total return of more than 11%.
For the sake of an example, let’s say I invest $10,000 today, divided between these stocks, and they correspond to EPR’s historical performance level over the next 25 years. This would make my investment worth about $119,000 at that point, assuming I reinvest all my dividends along the way. Assuming a dividend yield of roughly 6% – which is significantly less than the average yield of these two stocks today – I’d be looking at well over $7,100 in retirement income every year of my $10,000 investment.
Again, this is not guaranteed at all. The actual long-term performance of these REITs could be significantly better or worse. But the point is, you might be surprised by how real estate investment trusts can provide an income-producing nest egg over time. Now imagine if you had a 30 or 40 year timetable, or if you gradually increased your investment each year.
Should you invest $1,000 in Vici Properties now?
Please consider the following before purchasing shares in Vici Properties:
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Matt Frankel has positions in EPR Properties and Vici Properties. The Motley Fool holds and recommends positions in Vail Resorts and Vici Properties. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
2 High Dividend Stocks That Can Turn a $10,000 Investment Into an Annual Retirement Income of $7,000 or More Originally published by The Motley Fool
