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As the name implies, hotel stocks invest in properties which provide temporary accommodations, usually to tourists and travelers. However, these properties can consist of more than merely places to stay. Many hospitality stocks also involve leisure-oriented venues such as resorts, convention facilities, casinos, and cruise ships.
The stock market offers two avenues to invest in hotel stocks. One involves the standard approach of buying equity in the world's major hospitality corporations. In most cases, these hotel stocks will loosely follow the direction of the S&P 500 stocks.
For investors who prefer a focus on income or something closer to the property investor approach, they can buy into real estate investment trusts (REITs). REITs pay at least 90% of their net income to shareholders in the form of dividends. In return, the REIT does not have to pay income tax on its income earned from operations. REITs tend to pay higher dividends than S&P 500 averages, and this includes hotel REITs.
Hotel stocks offer a mixed blessing. In good times, high occupancy rates and rising payouts should bolster these hospitality stocks. However, hotels see business slowdowns during leaner times. In the case of the REITs especially, this will probably lead to lower payouts and stock selling.
Still, with steady cash flows and rising profits, these stocks to invest in offer financial stability in market niches that should help weather harder times and deliver returns:
Hospitality Properties Trust (HPT)
Income-focused investors interested in hotel stocks should look no further than Hospitality Properties Trust (NYSE: HPT ). HPT owns 524 properties in 45 U.S. states, Puerto Rico and Canada. Seven major hotel chains operate the hotel portion of their portfolio. The REIT also usually chooses properties in the suburbs of major metro areas located near interstate highway systems.
HPT tends to buy select-service and extended-stay hotels that cater to business clientele. HPT can further assist customers through their 199 travel centers located across the country. Travel centers depend less on economic cycles than hotels. Thus, when times become tough, HPT can derive some income even as hotels struggle.
Hospitality Properties stock has not seen a significant drop since the 2008 financial crisis. Like most stocks, it rose above 2009 lows. However, HPT stock has traded in a range since 2011. As such, buyers will probably not want to buy HPT hoping for stock-price growth. But what it doesn't offer in stock appreciation it makes up for in dividend payments.
Other than a temporary dividend cut in one quarter, this Newton, Massachusetts-based REIT has raised its dividend every year since 2011. Last year, it paid a $2.12 per share in annual dividend. At today's stock price, this translates to a yield of just over 8%.
HPT stock will probably offer little in the way of growth. However, with its high yield, rising dividend, it should continue to serve as a valuable income source to its investors for the foreseeable future.
Although many will want the income generated by REITs, investors should not ignore Marriott (NYSE: MAR ). The Bethesda, Maryland-based chain offers 1.3 million rooms on about 6,700 properties in 130 countries. The Ritz-Carlton, Courtyard, and Westin are among the 30 brands under the Marriott umbrella.
MAR stock stands out as a hospitality stock by offering both growth potential and income. Its value has also steadily increased over the last 10 years. MAR fell in price for most of 2018. However, this allows new buyers to purchase MAR at 24% below its 52-week high. The 17.9 forward P/E ratio comes in lower than that of Hilton (NYSE: HLT ), Hyatt (NYSE: H ) and Wyndham (NYSE: WYND ).
Moreover, analysts expect 2018 profits to come in 41.1% higher than the net income reported in 2017. Although profit growth will probably pause in 2019, Wall Street predicts that double-digit growth will resume in 2020.
MAR stock also bests its peers regarding its cash payout. MAR pays a $1.64-per-share annual dividend that yields just over 1.4%. Also, while its peers have seen uneven dividend growth, Marriott has increased its payout for eight straight years. For investors wanting this dividend income, along with a track record of profit growth and a rising stock prices, none of the other non-REIT hotel stocks offer the combined growth and income potential that MAR stock will likely provide.
MGM Growth Properties (MGP)
Source: Jennifer Woddard Maderazo via Flickr
Las Vegas-based MGM Growth Properties (NYSE: MGP ) spun out in 2015 when MGM Resorts International (NYSE: MGM ) separated its real estate assets from its operations. This REIT encompasses 10 properties located primarily in Las Vegas. The deal included iconic properties such as the Mirage, Mandalay Bay and the New York New York Casino. MGP handles only U.S. properties as the Chinese casino hotels remained under the MGM Resorts umbrella.
MGP stock increased following its 2016 IPO. However, since September 2017 it has remained range-bound. Today it trades at just over $30 per share, a level it first reached in the summer of 2017. As it closes in on its record high, many investors wonder if it will finally break through or retreat.
However, predicted growth surpasses that of most hotel stocks. Analysts predict profit growth for 2018 will come in at 38.8%. They believe that will slow to 18.3% in 2019. With these double-digit increases expected to continue for years to come, it should help justify the high multiple.
MGP stock also stands out on the dividend front. This year's payout of $1.79 per share produces a yield exceeding 5.8%. Also, despite the short track record, it has increased the dividend every year since its inception.
Given the profit growth, MGP stock should eventually break out of its range. Even if that takes more time than anticipated, new investors can earn a significant cash return while they wait. Between the payouts and the growth potential, MGP should compare well to other hotel stocks.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting.
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