Having the right mindset during a stock market correction can turn it from a challenge to an opportunity. If you have some cash to deploy, a sell-off is usually a great time to buy if you have a long time horizon. Since I’m still a couple of decades away from retirement, I always keep cash on hand to take advantage of opportunities that arise during a market sell-off.
One of my favorite places to go bargain shopping during a stock market correction is the real estate investment trust (REIT) sector. That’s because as REIT stock prices fall, their dividend yields rise. Three REITs that I plan to add to during the next market correction are AvalonBay Communities ( AVB -2.02% ), Realty Income ( O -1.37% ), and Medical Properties Trust ( MPW -7.72% ).
A premium-priced landlord
AvalonBay Communities is one of the country’s largest apartment owners. It focuses on leading metro markets along the coasts where apartments are almost always in high demand. It therefore tends to benefit from high occupancy levels and steadily rising rental rates. The REIT also has a top-notch balance sheet, giving it the financial flexibility to steadily expand its portfolio via acquisitions and development projects.
That has enabled the REIT to grow its dividend by a 5% annualized rate since its initial public offering while delivering a 13.4% total annualized return. AvalonBay’s ability to steadily grow shareholder value typically has its stock trading at a premium valuation. For example, the REIT currently offers a dividend yield of 2.6%, which is below the REIT sector’s 3% average.
While AvalonBay almost always trades at a premium valuation, shares tend to get cheaper during a market sell-off, meaning investors can scoop up shares of this high-quality apartment REIT at a more attractive income yield.
A top-notch income stream
Realty Income is one of the most durable REITs around. The company pays a monthly dividend that it has increased 115 times since its initial public offering, including in the last 98 straight quarters. The REIT has grown its dividend at a 4.4% compound annual rate while delivering 15.5% total annualized returns.
Those returns have made it a real wealth creator over the years. It should be able to continue growing value for shareholders in the future. It currently offers an attractive 4%-yielding dividend and has one of the strongest balance sheets in the REIT sector. That gives it the financial flexibility to make billions of dollars in acquisitions each year.
Given Realty Income’s durability, it’s a great stock to buy during a market correction. They usually provide investors with an opportunity to get this passive income producer at an even better value.
A healthy opportunity
Medical Properties Trust is a healthcare REIT that focuses on owning hospitals. It leases them back to operators under triple-net agreements, making the tenant responsible for maintenance, building insurance, and real estate taxes. That enables the REIT to collect steady rental income.
It has a long history of successfully growing its portfolio, income stream, and dividend. Its dividend growth streak is currently up to nine straight years. Meanwhile, it offers a compelling dividend yield of 5.9%.
Medical Properties should be able to continue growing that dividend no matter what’s going on in the stock market. It has a solid financial profile, giving it the financial flexibility to continue acquiring hospitals. Meanwhile, with market sell-offs sending its share price down, it offers investors an even more attractive income stream.
Taking advantage of tough times
While I don’t love stock market corrections, I’ve learned that they can be great opportunities to buy more shares of my favorite stocks. Since I love collecting passive income, sell-offs are ideal since lower stock prices mean higher dividend yields. That’s why I always keep a little bit of cash on the sidelines to add to my favorite income-producing REITs when the market takes a tumble.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.