2 Under-the-Radar Dividend Stocks With Market-Beating Potential

Yahoo

03-05-2025

AvalonBay Communities is aggressively moving into some of the fastest-growing U.S. markets.
Realty Income has lots of growth potential and has been beaten down in the high-interest rate environment.
Both stocks have market-beating potential over the long term.
Although the stock market has rebounded significantly from its lows, there are still some excellent bargains to be found by patient long-term investors. That's especially true when it comes to dividend stocks, as the persistent high-interest rate environment and uncertainty surrounding the Federal Reserve's future policy moves have created a headwind for income-focused investments.
Real estate investment trusts, or REITs, are an area of the market where there are some particularly interesting opportunities right now. Here are two real estate stocks that aren't exactly household names for many investors, but could be worth a closer look right now.
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AvalonBay Communities (NYSE: AVB) is one of the largest owners of multifamily real estate in the world, with 309 apartment properties containing nearly 95,000 apartment homes.
The company has been around for a while (its IPO was in 1994). But the strategy has shifted a bit recently from the company's traditional focus on large and high-cost metropolitan areas to expansion into some of the fastest-growing real estate markets in the United States.
Specifically, much of AvalonBay's newer investments are in the "expansion markets" of major cities in North Carolina, Southeast Florida, Texas, and Colorado. These markets all have positive net migration, as well as above-average job and wage growth, and housing is still relatively affordable. This is a new part of AvalonBay's business within the past few years, and has already been built up to 10% of the company's rental income. AvalonBay intends to increase this to 25% in the medium term.
I'm particularly excited about this aggressive move into Sun Belt markets because of AvalonBay's fantastic track record of value creation. The company's primary investment strategy is to develop properties from the ground up, and there are currently 19 communities under construction, into which AvalonBay is investing $2.5 billion. The company also strategically acquires existing properties, including eight Texas communities it has already acquired in 2025.
AvalonBay has a 3.4% dividend yield at the current stock price and has produced a total return (dividends plus stock appreciation) of 12.5% annualized since its 1994 IPO, handily beating the S&P 500 (SNPINDEX: ^GSPC). With a massive growth opportunity and proven track record, AvalonBay could be a great long-term real estate play in your portfolio.
I recently wrote an article explaining that if I had to choose just one stock to buy right now, it would be Realty Income (NYSE: O). Not only is Realty Income down by about 25% from its highs, but the company is well-positioned to deliver steadily growing income and excellent total returns over the long run.
The company owns about 15,600 properties, about three-fourths of which (by rental income) are freestanding retail. The other major property type is industrial, and there are also some gaming and agricultural holdings as well.
There are two big reasons why Realty Income is a bulletproof business:
First, its tenants are generally recession-resistant and/or resistant to e-commerce disruption. Most of the retail tenants sell things people need, are discount-focused, or provide a service (as opposed to selling physical goods).
Second, the tenants sign long-term lease agreements with gradual rent increases built in. These are triple net leases, which means the tenants cover essentially all the variable costs of property ownership: taxes, insurance, and maintenance.
Realty Income has lots of room to grow. It estimates that its addressable real estate market in the United States is $5.4 trillion in size, and it's even larger in Europe. Thanks to a long history of smart capital allocation, Realty Income has produced 13.4% annualized total returns since its IPO more than 30 years ago, and it currently has a 5.6% dividend yield, which it pays in monthly installments.
Of course, there's no guarantee that either company will replicate their returns from the past 30 years, but these track records of value creation speak for themselves. If you're looking for an income stock that could potentially be in your portfolio for decades, AvalonBay and Realty Income are worth a closer look.
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Matt Frankel has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.
2 Under-the-Radar Dividend Stocks With Market-Beating Potential was originally published by The Motley Fool