Merrill Lynch Says It Is Time to Buy the Dividend Growth REITs

Rising interest rates have hammered numerous sectors of the stock market. Mortgage real estate investment trusts (REITs), master limited partnerships and the traditional REIT stocks have all taken a beating. Typically market volatility like we have experienced so far this summer can signal a change in leadership within a sector. The REIT analysts at Merrill Lynch think that this is indeed the case.

Recently we have written at length about the market leadership of stocks that have dividend growth potential over high-yielding dividend stocks. The REIT team at Merrill Lynch feels strongly that the key for investors within their sector is exactly the same. Abandon high-yielding names for the REITs that can grow their dividend over time. In a new report, they highlight a list of top REITs to buy that should excel at providing investors dividend growth.

SL Green Realty Corp. (NYSE: SLG) engages in the property management, acquisitions, financing, development, construction, and leasing. It also provides tenant services to its clients. The firm invests in real estate markets of the United States. It primarily invests in commercial office and retail properties. Merrill Lynch has a $101 price target for the stock. The Thomson/First Call estimate is lower at $92. Investors receive a 1.5% dividend. REIT distributions can contain return of principal.

CubeSmart (NYSE: CUBE) is a self-administered and self-managed real estate investment trust focused on self-storage facilities. The company announced last week a new $800 million unsecured bank financing package. The new amended credit facilities will help to lower the companies base borrowing costs and keep their debt maturities well staggered. Merrill Lynch has an $18 price target, and the consensus stands at $18 as well. Investors are paid a 2.7% dividend.

CoreSite Realty Corp. (NYSE: COR) is a provider of network-dense data center campuses and the CoreSite Mesh, which enable interconnected communities of service providers and enterprises. Favorably positioned in a high demand-low supply market segment, CoreSite operates 14 data centers (1.2 million square feet) and has three more data centers under development. The Merrill Lynch price target for the stock is $38, the same as the consensus target. Investors are paid a 3.7% dividend.

Cousins Properties Inc. (NYSE: CUZ) owns, develops and manages real estate portfolio, as well as performing certain real estate-related services in the United States. The company operates through four divisions: Office/Multifamily, Retail, Industrial and Land. Headquartered in Atlanta, the company focuses on properties in the fast growing South, Southeast and Southwest portions of the United States. Merrill Lynch has a $11.75 price objective, and the consensus target is at $10.63. Investors receive a 1.9% dividend.

Apartment Investment & Management Co. (NYSE: AIV) engages in the acquisition, ownership, management, and redevelopment of apartment properties and has consistently grown their dividend. The Merrill Lynch target for the stock is $33, and the consensus is at $32. Investors are paid a 3.4% dividend.

Equity Residential (NYSE: EQR) like other apartment REIT’s, may benefit from rising rates as some potential homebuyers decide against purchasing and continue to rent. With rental vacancy rates still at multiyear lows, rental pricing power is still very strong. Merrill Lynch has a $62 price target, and the consensus target is $62.50. Shareholders are paid a 2.9% dividend.

CyrusOne Inc. (NASDAQ: CONE) high-performance Texas data centers give customers the flexibility to leverage the most advanced server technology, accommodating 250 watts per square foot and higher, which in turn has enabled CyrusOne to become the leading technology provider for seismic exploration research and development. A surging oil industry has spurred high growth for the company. Merrill Lynch has a $24.50 target for the stock, but the consensus target is $25.50. The company has yet to initiate a dividend but is expected to.

With rate risk hurting fixed income and bond proxies, high-dividend yield shifted from being a top 10 strategy through mid-April to the worst performer in May. However, dividend growth has outperformed and may be a better hedge against rising rates. It makes sense for investors to look for dividend growth in all sectors, because that translates to earnings growth.