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5 Cheap Dividend Stocks Long-Term Investors Should Consider Now

Matthew Frankel, The Motley Fool

Even after the recent stock market correction, valuations are still on the high end throughout most of the market. However, thanks to rising interest rates, income-focused stocks such as real estate investment trusts (REITs) have dramatically underperformed. In fact, while the S&P 500 is still up by 12% over the past year, the Dow Jones Equity REIT Index is down by 7% over the same time period.

Despite the poor recent performance, many REITs make fantastic long-term investments. Not only can you get a reliable, growing income stream, but you also get the benefit of property appreciation over time. Here are five in particular that I'd suggest for investors who measure their returns in terms of decades instead of months or years and why I like each one.

A red sale sign posted on a glass storefront window.

Image source: Getty Images.

Company (Symbol)

Recent Stock Price

Dividend Yield

1-Year Change

HCP, Inc. (NYSE: HCP)

$23.16

6.4%

(27.2%)

National Retail Properties (NYSE: NNN)

$39.25

4.9%

(11.1%)

EPR Properties (NYSE: EPR)

$54.95

7.9%

(26.1%)

Digital Realty (NYSE: DLR)

$103.21

3.9%

(5.1%)

Iron Mountain (NYSE: IRM)

$33.55

7.1%

(5.5%)

Data source: TD Ameritrade. Prices, performance, and yields as of March 26, 2018.

Why REITs have performed so poorly

The easy answer is that the equity REIT sector has been under pressure because of rising interest rates. When interest rates rise (specifically, bond yields), income-seeking investors often decide to sell dividend stocks in favor of "safer" bonds, which now pay more.

Think of it this way: If a certain REIT yields 5% and the 10-year Treasury note yields 3%, an income investor may be inclined to take on the additional risk associated with the REIT. On the other hand, if the Treasury's yield shoots up to 5% as well, it may seem smarter to choose the bond for income. The effect is that this creates selling pressure on the REIT, which causes its price to drop. Eventually, the lower price will produce a higher yield that will attract investors back in to the REIT.

In addition, there have been some industry-specific headwinds that are weighing on certain types of REITs. For example, the recent wave of retail bankruptcies and store closures are hurting retail property REITs. Also, oversupply fears in the self-storage and healthcare industries are weighing on REITs with those specializations.

5 of the best REITs to look at now

1. HCP -- HCP is one of the largest REITs focused on healthcare properties. After a substantial portfolio restructuring over the past couple of years, HCP is now focused on stable, private-pay senior housing, medical office, and life science properties. The senior citizen population in the U.S. is expected to explode over the next few decades, which should create a steady rise in demand for HCP's core property types, and thanks to short-term oversupply worries, REITs with senior housing properties are trading for rock-bottom valuations.

2. National Retail Properties -- Many investors are scared to invest in anything to do with the retail industry, and with the wave of bankruptcies and store closures in the industry, who could blame them? However, National Retail Properties invests in the right kind of retail.

Specifically, most of National Retail's more than 400 tenants operate in areas of retail that are resistant to e-commerce headwinds and recessions. For example, service-based businesses such as restaurants and automotive service centers are businesses that people have to physically go to. And businesses like drug stores and convenience stores sell things that people need, not just things they want, which is the type of retail that is having most of the problems you've been hearing about.

3. EPR Properties -- EPR Properties has holdings in entertainment properties (mainly megaplex cinemas), recreation properties (TopGolf is a major tenant), and education properties such as charter schools. The first two property types are a play on the millennial generation, which seems to prefer experiences over ownership. And the education component of the portfolio adds diversification as well as a high-potential market of its own. In fact, more than one million American students are currently on charter school waiting lists.

4. Digital Realty -- The need for secure and reliable computing space has grown dramatically over the past decade or so, and is showing no signs of slowing down. In fact, with the expected surge in connected devices in the coming years, there could be much more room to grow. Digital Realty is a REIT that owns and operates data center properties, with operations in 12 countries and 32 million square feet of rentable space. Among the largest of the company's 2,300 tenants are tech heavyweights such as IBM, Facebook, and Oracle.

5. Iron Mountain -- Companies need secure places to store documents, both in hard copy and digital form. And in this massive business, Iron Mountain is in a league of its own. The company's customer list includes 95% of the Fortune 1000, and there are 680 million cubic feet of documents stored in the company's facilities, as well as a tremendous number of medical images and other items. In addition, Iron Mountain has a big document-shredding business (you may have seen an Iron Mountain shredding truck on the road at some point). Furthermore, Iron Mountain has been slowly but surely getting into the data center business. I've already mentioned the potential in the data center industry, and if Iron Mountain can successfully leverage its brand name and roster of more than 230,000 customers, it could have a major growth opportunity on its hands.

A word of caution

To be perfectly clear, I'm not attempting to call a bottom in these REITs. They could certainly fall more, and if bond yields continue to rise -- the 10-year Treasury is a good indicator for REITs -- that's exactly what I would expect.

Instead, the point is that these are excellent long-term investments that are on sale right now, despite having strong businesses and rock-solid dividends. It's entirely possible that you won't be thrilled with these investments a month, a year, or even a few years from now. However, decades down the road, I'm confident that you'll be glad you had the foresight to add them to your portfolio when they were beaten down. In fact, I own three of the five in my own (see the disclosure below) and have no plans to get rid of them anytime soon.

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Matthew Frankel owns shares of Digital Realty Trust, HCP, and Iron Mountain. The Motley Fool owns shares of and recommends Facebook. The Motley Fool owns shares of Oracle. The Motley Fool is short shares of IBM and has the following options: short June 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.