Why I just bought these 2 high yielding REIT stocks

Own real estate without the hassle of owning real estate. This is the great advantage of investing in real estate investment trusts (REITs). And REIT stocks come in a lot of different flavors.

Real estate income (A -0.32%) and National Storage Affiliates Trust (NSA 2.23%) they are great examples. The former owns several types of commercial properties, while the latter focuses exclusively on self-storage facilities. Here’s why I just bought these two high-yielding REIT stocks.

1. Solid businesses with great long-term prospects

I like to buy stocks and hold them for years. My top criteria in picking stocks are the strength of their underlying businesses and how likely they are to perform well over the long term. Both Realty Income and National Storage Affiliates (NSA) tick these boxes well.

Realty Income ranks as the seventh largest REIT worldwide with a market capitalization of $55 billion. It has been in business for 55 years and boasts a solid A3 and A- (average investment grade) credit rating from Moody’s and S&Prespectively.

REIT diversification is a big plus. Realty Income owns 15,450 properties with clients in 90 industries. Its top tenants include Kinds of dollarsI Walgreens, The dollar treeand Wynn Resorts. However, no customer accounts for more than 3.4% of the annual contract rent.

Realty Income has good growth prospects in the US, including opportunities in retail, consumer-focused medical centers and data centers. However, the big prize for the company is in Europe, which represents a total addressable market of $8.5 trillion.

NSA is much smaller than Realty Income, with a market cap of less than $4 billion. It owns 1,052 self-storage properties spread across 42 states and Puerto Rico. About 65% of NSA properties are located in the Sunbelt, a region with an influx of migration and strong employment and housing trends.

Self-storage is a particularly attractive real estate niche. Not only have self-storage REITs outperformed other sector REITs over the past 30 years, but they have also been significantly less volatile.

I like NSA’s growth prospects in large part because of the fragmentation of the self-storage market. The top 50 operators claim only 32% of the total market by number of facilities. NSA’s market share is only 2%.

2. A good upside to strong total returns

Realty Income offers a forward dividend yield of 5.02%. The company has also increased its dividend for 29 consecutive years, with a compound annual growth rate of 4.3% since 1994.

NSA is not far behind with a forward dividend yield of 4.75%. The REIT boasts a decent dividend growth track record, too, and has increased its dividend for eight consecutive years. What’s particularly notable is that NSA has increased its dividend by 75% over the past five years.

I’m not relying on dividend income yet, although it could help fund my retirement in the future. The key advantage of Realty Income and NSA’s high dividends, in my view, is that they give both stocks a good edge in delivering strong total returns.

3. A Fed-fueled catalyst could be on the way

I invest for the long term, but I certainly don’t mind if the stocks I buy have positive short-term catalysts. Both Realty Income and NSA could have a Fed-led catalyst on the way.

The Federal Reserve looks likely to cut interest rates later this month. With any luck, this will be the first of many rate cuts.

REIT stocks often respond well to lower interest rates for a few reasons. First, they rely on loans to buy additional properties. When rates drop, they can invest in expansion at lower costs. Second, lower rates drive down bond yields. Income investors may see REIT stocks as attractive alternatives to bonds when interest rates fall.

Again, this is not my primary reason for buying shares of Realty Income and NSA. However, I think there is a good chance that my investments will pay off sooner rather than later due to the likelihood that the Fed will cut interest rates.