If you’ve been paying attention this year, you may have noticed how I – and my closely connected colleagues –have spent a decent amount of time writing about certain speculative picks.

It’s true that some speculative stocks can do very well for themselves – within reason. I wouldn’t have written about the ones I have as possible portfolio plays otherwise.

Now, I don’t really think penny stocks are the way to go as a general rule, if ever. While I can’t tell you the exact percentage of them that make investors money versus don’t…

Let’s just say it isn’t good.

Because as tempting as the potential rewards might be, the risks are intensely unattractive.

That’s why I only ever publish positive perspectives on speculative stocks after very careful research and intense levels of transparency… the same way I publish everything else.

It’s also why I’ll add in cautions to seek “1 percent or less exposure” to those recommendations, as I did with CorePoint (CPLG) earlier this month. That way, if you do decide to take a bite of the forbidden fruit, it won’t cost you paradise.

3 High-Quality at Your Fingertips

The majority of your portfolio should be filled with high-quality stocks, including high-quality REITs. That’s the main premise of this article, and the stocks you’ll find below are nothing less.

Simon Property Group (SPG) is a dominant S&P 100 company and landlord to 233 retail real estate properties including Malls, Premium Outlets® and The Mills® comprising 191 million square feet in North America, Europe and Asia. This juggernaut owns trophy malls and outlets and the tenants in the U.S. portfolio generate annual retail sales of more than $60 billion.

While most mall REITs have witnessed negative earnings growth, due to continued store closures, Simon has continued to generate impressive growth because of its disciplined risk management practices. Notably, Simon has achieved a fortress balance sheet (A-rated by S&P) and very healthy dividend coverage (payout ratio is around 65%).

Simon’s dividend yield is 6.0 percent and given the strong development pipeline ($1.8 Billion) generating yields of 8 percent, the stalwart REIT should continue to generate stead and reliable dividend growth. The company recently announced a 2.4 percent increase in 2020, and we maintain a Strong Buy with expectations for shares to return around 20 percent in 2020.

Federal Realty (FRT) is another solid retail pick that invests in shopping centers and mixed-use properties. While most REITs were forced to cut their dividend during the last recession, Federal Realty forged ahead utilizing its smart capital allocation strategies to build upon its impressive dividend record.

This is what’s allowed the company to achieve what literally no other REIT on earth has, 50 years-plus of consecutive dividend growth. To do that, the company has maintained a safe balance sheet (A-rated by S&P) so it was immune from capital markets shutting down.

Federal Realty’s portfolio includes 105 well-situated shopping centers, totaling 24 million square feet of leasable space, leased to 3,000 tenants, in some of the most densely populated, fastest-growing and most affluent cities in America. It also owns nearly 2,700 apartment units as part of its increasingly mix-use portfolio.

Shares are now trading at a 4.5 percent discount to our Fair Value, that equates to a dividend yield of 3.3 percent and a price to funds from operations multiple of 20.1x. The dividend is well-covered, and we believe shares could return between 10 percent to 15 percent over the next twelve months.

Our final high-quality pick is CyrusOne (CONE), a data center REIT that has seen shares beaten down lately due to a slow down in hyperscale demand. What this means is that the growth rates of the large giants – Amazon, Microsoft, and Google – has slowed, but CyrusOne has other demand drivers that help balance the revenue stream.

More recently, and partly as a result of the hyperscale slowdown, CyrusOne decided to rightsize its employee count, pointing to the Chinese hyperscale market that has died down considerably, due to tariffs.

After discussing this with the CEO in detail, I am convinced that the company is making the necessary steps to cut costs in the U.S., and I am even more convinced that the European business should continue to accelerate, providing sound diversification to the business model.

Shares topped $77.60 last September and have since fallen to $61.84. We find the valuation extremely attractive, based upon the dividend yield of 3.2 percent and expected growth of around 10 percent in 2020 and 2021. We recently upgraded our recommendation to a Strong Buy, based upon the generous returns of 25 percent we forecast over the next twelve months.

I own shares in SPG, FRT, and CONE.

Author: Brad Thomas

Source: Forbes: The Cream Rises To The Top: 3 High-Quality REITs On Sale

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