The reemergence of growth stocks due to the artificial intelligence hype has been the story to start the year, but another area that often gets overlooked during bullish periods are real estate investment trusts (REITs). Like growth stocks, REITs were decimated last year as the Fed embarked upon an aggressive rate-hiking scheme. Combined with prospects of an impending economic slowdown, REITs suffered their worst year in 2022 in more than a decade.

This has created a phenomenal opportunity to buy these undervalued, oft-forgotten investments, as the path of future interest rates has reversed course. Real estate investment trusts continue to be a great way to balance your portfolio while gaining exposure to the real estate sector.

REIT Investing – An Underappreciated Vehicle

Adding these incoming-producing investments can result in significant advantages over traditional real estate investing including increased liquidity, greater diversification, tax benefits and potentially higher returns with lower risk.

Real estate investment trusts either own or manage income-producing real estate, normally through directly investing in properties or the mortgages on those properties. The IRS mandates that REITs must pay out 90% of their taxable income to shareholders. This typically translates into much higher dividends than your average S&P 500 stock.

One of the best ways to increase returns when investing in REITs is to compound the dividends received. Investors may also choose to utilize a Dividend Reinvestment Plan (DRIP), which automatically reinvests the dividends received into additional shares. 

REITs not only offer above-average yields, but also the potential for future price appreciation. As treasury yields have begun to decline from the peaks of last year, REITs are becoming attractive once again. REITs tend to outperform when interest rates are falling, historically generating strong returns when the Fed becomes more dovish. All else being equal, lower interest rates tend to increase the value of properties and decrease REIT borrowing costs. Furthermore, lower rates make the relatively high dividend yields generated by REITs more attractive, increasing their appeal to income-seeking investors.

Is Now a Good Time to Invest in REITs?

There are still plenty of skeptics that we have entered a new bull market. Bull or bear, the truth is that the economy remains on sound footing, supported by a resilient labor market. A stronger economic backdrop normally leads to higher occupancy rates, increased NOI (net operating income), and expanding property values. All of these components typically lead to higher dividend payments for REIT investors.

The Zacks REIT and Equity Trust – Retail industry is currently ranked in the top 39% out of approximately 250 industries. Because it is ranked in the top half of all industry groups, we expect this group to outperform the market over the next 3 to 6 months.

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success. Note that this group remains relatively undervalued:

Image Source: Zacks Investment Research

Let’s take a closer look at an individual REIT within this industry group.

Tanger Factory Outlet Centers (SKT Quick QuoteSKT - Free Report)

Tanger Factory Outlet Centers is a leading operator of upscale outlets that owns and manages a portfolio of nearly 40 properties. Its outlet centers are located in 20 U.S. states and Canada. These centers are leased to over 2,700 stores that are operated by more than 600 different brand name companies. Tanger Factory Outlet Centers is one of the largest owners and operators of outlet centers in the United States.

A fully-integrated, self-administered and self-managed REIT, SKT has exceeded the funds from operations (FFO) estimate in each of the past four quarters. A Zacks Rank #3 (Hold), the company most recently posted first-quarter FFO of $0.46/share, a 4.55% beat versus the $0.44/share Zacks Consensus Estimate. Management also raised its full-year guidance for core FFO per share. SKT has delivered a trailing four-quarter average beat of 6.36%.

Back on April 11^th, SKT raised its quarterly dividend by 11.3%. The company currently pays a $0.98 (4.84%) dividend, and the share price has added to the return this year, treating investors with an additional 15.6% return. This REIT recently hit a 52-week high:

Image Source: Zacks Investment Research

Analysts covering SKT are in agreement and have raised full-year earnings estimates by 1.63% in the past 60 days. The 2023 Zacks Consensus Estimate now stands at $1.87/share, reflecting potential growth of 2.19% relative to last year.

Image Source: Zacks Investment Research

Contrary to conventional wisdom, the opportunity still exists for investors to create a reliable stream of income from the equity markets. REITs are a fantastic way to gain exposure to the real estate sector while creating a steady dividend stream. Make sure to keep an eye on leading REITs like SKT that are experiencing positive earnings estimate revisions.