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Most REITs Are Less Volatile Than the S&P 500: Here Are 3 Excellent Picks

Picking stocks can be fun. It can also be stressful. The bigger a stock's potential gain is forecast to be, the more volatile that ticker seems to be. It's a treacherous dynamic simply because it's all too easy to bail out of a falling stock at the worst possible time -- that is, right before a rebound.

If this reality is agonizingly familiar to you, there's a solution: Swap out at least some of your stocks for real estate investment trusts (REITs). Not only do these dividend-oriented investments ebb and flow at different times than ordinary stocks do, but data compiled by The Motley Fool also says they generally outperform the broad market. Three of these names stand out among the rest right now, particularly if this is your first foray into REITs.

But first things first.

The skinny on REITs

If you're not familiar with them, REITs aren't complicated. Just as the name suggests, real estate investment trusts own a variety of revenue-generating real estate. These can include economically sensitive properties such as hotels and motels. By and large, though, most REITs hold rental real estate, such as apartment buildings, malls, office buildings, retail space, and warehouses. These can be sensitive to economic headwinds, too. However, these tenants tend to be organizations that are willing and able to make their monthly rent payments. This is why REITs are such great dividend-paying investments. There's reliable underlying cash flow to support their dividends.

But dividends aren't your thing? Maybe they should be. Data dug up by our research team suggests that in the long run, when factoring in their dividend payments, REITs actually outperform the S&P 500 by an average of about one percentage point per year.

Investor comparing REITs to stocks.

Image source: Getty Images.

The short run's a slightly different story. Last year, the broad market's advance was more than twice as big as that of the average REIT. The S&P 500 has outperformed REITs for most of the past 10 years, in fact, albeit only slightly.

That superior long-term performance comes with a couple of important footnotes, however.

First, interest rates were unusually low for most of that 10-year stretch. Then they suddenly soared beginning in 2022 as a once-in-a-lifetime pandemic wound down. The scenario and the sheer speed of its reversal favored stocks while at the same time it disadvantaged rate-sensitive REITs.

And the second footnote? Lagging performance aside, shares of REITs have been and remain less volatile than conventional stocks. They move about 25% less erratically than stocks do. They also often don't move in sync with the stock market. If nothing else, a little more exposure to real estate trusts and a little less exposure to ordinary stocks would have allowed you to sleep better for the better part of the past several years.

With that as the backdrop, if you're ready to try something different here are three REITs to consider stepping into.

1. W.P. Carey

W.P. Carey (NYSE: WPC) owns a wide variety of commercial and industrial properties. The biggest chunk of its real estate portfolio is retail property, but that's still less than one-fourth of all its rent-bearing holdings; some of those retail tenants are car dealerships. No other industry accounts for more than 10% of its tenant list, and its single-biggest tenant, U-Haul, contributes less than 3% of its total collected rent. That's a wonderfully diversified base of rent-payers supporting the REIT's current annualized dividend yield of 6.2%.

That's not what makes W.P. Carey such a compelling prospect, however. Far more interesting is the way its rental agreements are structured. This company is a net lease REIT, meaning tenants are responsible for covering costs such as taxes, insurance, and maintenance. This model takes a good deal of the risk of being a landlord of the landlord. W.P. Carey also negotiates built-in rental rate increases into its leases before they're signed, assuring that it collects rent payments at fair market rates well into the future.

Regular followers of REITs may remember that this one cut its dividend payment to the tune of 20% last year, snapping more than a couple of decades' worth of yearly payout increases. It's a red flag to be sure. Except, the decision isn't necessarily a sign that this REIT is fighting an uphill battle that will ultimately lead to more dividend reductions. W.P. Carey largely cut its dividend because it was spinning off a wide swath of its office properties, right-sizing its asset base to reflect the waning need for this kind of real estate. That deal is now done though, and the defensive-minded move won't need to be repeated going forward.

2. Realty Income

Realty Income (NYSE: O) is a slightly different kind of REIT. Rather than diversifying into several types of industries, it exclusively handles retail and retail-related space. Its top tenants include Dollar General, Walgreens, Dollar Tree, and 7-Eleven. Much like W.P. Carey, however, its tenant list is still highly diversified. No single customer accounts for more than 4% of its business.

It seems like a risky focus. Retailers are already inherently sensitive to economic headwinds. They're even more so now, given the industry's struggle against the rise of online shopping alternatives. Take a closer look at Realty Income's customers, though. These aren't just retailers that can hold up in a challenging environment. Many of them may even thrive on economic lethargy.

That's what the REIT's results suggest, anyway. Not only has it paid a dividend every month -- yes, monthly -- since it began operations back in 1969, but it also has raised its monthly payout 124 times since then. That money's obviously coming from somewhere.

Realty Income's current yield stands at just under 6%.

3. Digital Realty Trust

Last but not least, consider taking on a stake in Digital Realty Trust (NYSE: DLR). At 3.4%, its dividend yield is lower than Realty Income's or W.P. Carey's. What this REIT lacks in yield, however, it more than makes up for in potential growth.

See, Digital Realty Trust specializes in data centers, and increasingly, artificial intelligence (AI) data centers.

The need is certainly real. Plenty of companies already utilize massive computer server banks. But as the amount of digital data being collected expands, so too does the need for more capacity to do something with it. The advent of artificial intelligence only exacerbates this need. While powerful, AI applications require even more computing and data-storage capacity. That means more computer servers, installed on more racks, in more data center buildings. Most enterprises just don't have the for room these facilities on their campuses; many institutions also need these facilities geographically dispersed.

Enter Digital Realty Trust. It's operating more than 300 different data center facilities in over 25 countries and more than 50 different major metropolitan areas. Whatever need there is, this unique REIT can deliver.

The clincher: Digital Realty Trust is already partnered with some of the world's biggest tech names, including Amazon, Nvidia, IBM, and Microsoft. Clearly, it's doing something right.

None of these tickle your fancy? That's OK. There are plenty of other REITs out there that minimize volatility just as much, without crimping your long-term returns.

Should you invest $1,000 in W. P. Carey right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, Microsoft, Nvidia, and Realty Income. The Motley Fool recommends International Business Machines and W. P. Carey and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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