If you were making a list of the top 5G stocks to buy, what would you put on it?
Sure, they're all good companies. But when it comes to investing, the better plays on a given trend are often the companies no one is talking about yet. Because when they do get "discovered," the Johnny-come-latelies will drive the price up – dramatically increasing your potential gains.
The under-the-radar 5G stocks I have in mind are REITs – real estate investment trusts. These types of stocks own real estate and typically distribute most of the rent they collect as dividends.
Our conversation resulted in a wealth of insight – including his thoughts on each of the picks I'm about to share with you.
"Few people realize that real estate investment trusts actually outperform stocks over the long run – and they're a fantastic way to invest in 5G," Melvin said. "Cell towers are going to be a lot like the highway that information travels along. Cell tower operators will be the toll collectors. Data centers will act as an off-ramp where the data can be gathered, used, and stored. Both property types should do very well with the advent of 5G."
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As trends go, 5G is a $1.3 trillion opportunity. It's between 10 and 100 times faster than current 4G technology. That speed will make possible such things as enhanced mobile broadband, self-driving cars, and ingestible health monitors.
5G will change our lives, and it will be huge.
ResearchandMarkets estimates the total 5G market will grow to $53.93 billion by 2020 and a staggering $252 billion by 2025.
Each of the five REITs I'll be talking about here is a top 5G stock to buy, although I do have one favorite.
Before I give you those picks, it's important to understand just what makes 5G special…
Why 5G Stocks Have Such Great Potential
The transition to 5G will be unlike any other in mobile communications. Make no mistake, this is not just about getting more data to your smartphone, as previous upgrades have been.
This new standard is about more than extra bandwidth. It's also about speed – specifically something called latency. That's the time interval between when a signal is sent and the response to that signal. And 5G reduces latency by a factor of 10 over 4G.
Latency is low enough with 4G that we don't notice it on our smartphones. But for many of the new, 5G-enabled applications – the autonomous cars, smart energy grids, and healthcare devices – minimal latency will be crucial.
But the benefits of 5G will require much beefier infrastructure than exists now to support all that speed and bandwidth.
That's where the opportunity lies for the cell tower and data center REITs.
Because 5G will require more and larger pieces of equipment, the cell tower companies will be able to extract more revenue from each site.
The data center REITs benefit from the need to process the massive volumes of data closer to the source rather than in remote locations. The low-latency applications of 5G won't work if the data is delayed by traveling too far from the source.
The data center REITs have solutions to this, which they are eager to sell to the major carriers.
Now let's take a look at those picks and what Melvin had to say about them…
The Top 5G REITs to Buy
Crown Castle International Corp. (NYSE: CCI)
Dividend yield: 4.26%
Leases with the four major U.S. carriers make up 74% of the revenue of this cell tower REIT. The leases provide recurring revenue that is bound to grow as the carriers add 5G equipment. Crown Castle is also unique among the cell tower REITs in that it has invested heavily in small cells, a piece of 5G tech the company expects to create "decades of opportunity."
Melvin's take: "Crown Castle is the best pure play in the United States. As the 5G network is built out, this REIT – with 40,000 cell towers and approximately 65,000 route miles of fiber supporting small cells and fiber solutions across every major U.S. market – will be an obvious beneficiary. Each tower can hold up to six tenants, and right now the average Crown Castle tower has just two, so there is plenty of room for expansion to increase cash flow."
Digital Realty Trust Inc. (NYSE: DLR)
Dividend yield: 3.84%
DLR is the world's largest data center REIT – and as such, it is ideally positioned to profit from the deployment of 5G. Digital Realty has produced consistent 12% yearly growth in its funds from operations, with its dividend growing accordingly. In fact, the company has boosted its dividend for 13 straight years. And the consensus one-year price target on DLR is $125.65, an 18% gain from the current price of $106.30.
Melvin's take: "Digital Realty Trust owns 198 data centers across 32 metropolitan markets around the world. They have more than 2,300 corporate clients, including global heavyweights like IBM Corp. (NYSE: IBM), Facebook, Inc. (NASDAQ: FB), Verizon, AT&T, and Oracle Corp. (NASDAQ: ORCL). And it's made some smart acquisitions in the past year to grow its portfolio of properties – including over 400 acres near its Ashburn, Va., facility (which just happens to be close to the planned new Amazon headquarters). This is a well-run data center REIT with an aggressive acquisition strategy that should allow for high long-term total returns for long-term investors."
SBA Communications Corp. (NASDAQ: SBAC)
Dividend yield: None (yet)
SBA is the No. 3 cell tower REIT in the United States, but it also has a significant presence in Central and South America. It owns 30,000 towers in all. Since the markets outside the U.S. are a few years behind in deployment, SBA's 5G benefit will be protracted over a longer period than CCI's. One drawback to SBAC is that while it has restructured itself as a REIT, it does not yet pay a dividend. However, the company expects to start paying one in 2021.
Melvin's take: "SBA Communications is more of an 'Americas' cell tower investment, as it has towers in the North, Central, and South America. Its two largest markets are the United States and Brazil, with 16,000 and 8,000 cell towers respectively. Earnings have been growing at more than 20% over the past five years, and that should increase very rapidly thanks to the 5G rollout."
Equinix Inc. (NASDAQ: EQIX)
Dividend yield: 2.46%
This data center REIT has had 63 straight quarters of rising revenue – a streak that goes back nearly 16 years. Annual revenue growth has averaged 26% over the past decade. And Equinix is expanding rapidly to exploit the 5G opportunity, with 30 construction projects currently underway. The consensus one-year price target on EQIX is $484.96, a 29% gain from the current price of $375.
Melvin's take: "Equinix has the infrastructure to handle the speed of 5G in place and ready to go – not just in the United States, but in major markets around the globe. The company operates in 52 markets across five continents with more than 9,800 corporate customers. It is already seeing strong growth as a result of things like artificial intelligence, the Internet of Things, virtual reality, and the increased need for cloud computing and storage."