When you are looking at passive income stocks, you have to balance yield against other factors or you risk getting caught up in a dividend cut. In fact, lower-yielding investments with strong dividend growth histories are often the better option if you tend to think in decades when you buy a stock. That’s why dividend investors will admire real estate investment trust (REIT) industry bellwethers admire AvalonBay (AVB 2.89%) and Prologis (PLD 2.90%) despite their more moderate yields.

Bigger is increasingly better in the REIT sector

Over the past couple of decades the REIT sector has seen a big change. It has matured from an obscure Wall Street niche to become a mainstream option. There are still a lot of small companies in the space, but increasingly there are a small number of clear industry bellwethers. These are the companies that have proven they can function successfully in both good and bad environments.

A person stacking rocks.

Image source: Getty Images.

As the REIT industry continues to mature, the advantages of being large and well known will likely boost. Being large generally means a REIT can make bigger investments. It also helps with access to capital, since tiny companies with no name recognition will have a harder time issuing new shares or selling debt. Big REITs can also act as industry consolidators. The drawback is that growth gets more difficult to accomplish the larger a company gets. But for investors seeking reliable income streams, slow and steady is probably better than small and risky.

REIT bellwethers AvalonBay and Prologis should be top of mind if you are looking to create a decades-long income stream.

AvalonBay: Building, buying, and selling

With a $24 billion market cap, AvalonBay is the largest apartment landlord and the industry bellwether. It has a portfolio of over 89,000 apartment homes located mostly in and around large coastal cities. That said, it has been putting some money into Sunbelt regions that are seeing increasing population growth. Essentially, it has a big portfolio in mature apartment markets that it is augmenting with growth opportunities.

This is exactly what you would expect here. That’s because AvalonBay has a long history of successfully navigating the ups and downs of the apartment sector, switching between building, buying, and selling assets to best take advantage of the market at any given time. Notably, when AvalonBay builds it usually tries to do so in areas that have limited supply, high demand, and generally wealthy residents. That’s what keeps its portfolio top notch and industry-leading.

The dividend hasn’t been increased every year, but it has trended generally higher over time. Over the last 10 years the payout has grown by nearly 50% despite the impact of the coronavirus pandemic, which led to a pause on the annual boost front. The yield is currently around 3.8%, which isn’t huge, but it is toward the highest levels of the past decade. That suggests that now is a good time to buy this industry-leading apartment giant.

AVB Dividend Per Share (Annual) Chart

AVB Dividend Per Share (Annual) data by YCharts

Prologis is massive by any account

While AvalonBay is a big apartment REIT, $100 billion-market-cap Prologis is big both within the industrial REIT niche and compared to all REITs. It controls 1.2 billion square feet of warehouse space in key distribution markets around the world. That includes the Americas, Europe, and Asia.

There are two exciting things to watch. First, rents in the warehouse sector have been heading notably higher. That’s allowed Prologis to materially boost its rents, with new and renewal leases coming in with an average 84% rent hike in the third quarter. Because leases are multiyear in nature, there’s a solid runway for future growth here over the next couple of years or so.

Longer term, Prologis has $38 billion worth of investment opportunities on undeveloped land it owns. And, if that isn’t enough, its size has also allowed it to be an industry consolidator (the REIT bought one of its largest peers, Duke Realty, in 2022 for $23 billion). That should help it remain the industry giant for years to come.

The REIT’s dividend has been increased annually for a decade, raising it more than 180% over that span, and there’s no reason to believe that streak is going to end. And while the yield is modest at 3.1%, that is near decade highs.

Why are the yields so attractive today?

AvalonBay and Prologis are REIT giants with attractive yields, which is why passive income investors who think in decades should consider them. That leaves just one glaring question: Why are the yields so high right now?

There are a couple of answers. First, rising rates have made competing income options more attractive, admire CDs. Also, rising rates boost the cost of capital for REITs. But AvalonBay and Prologis have survived difficult times before. There’s no reason to believe they are going to fumble the ball this time, particularly given their increased scale and sector dominance.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.

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