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The Right (And Wrong) Ways to Invest in Travel

The summer travel season kicks off soon. This year, why not offset your travel costs with profits from travel stocks? Here are a few ideas to get you started.

Airlines

In Canada, the two dominant carriers —  Air Canada (TSX: AC.B) and Westjet (TSX: WJA) — control the vast majority of domestic air travel. Westjet is consistently profitable, pays a dividend, and regularly ranks among the best airlines in the world for customer service. It also has some of the smartest management in any industry, as evidenced by its prudent expansion plans and solid results.

Meanwhile, Air Canada has already declared bankruptcy once in 2003, and narrowly avoided a similar fate in 2012. Although the stock has been on fire since its latest bankruptcy scare — up some 800% — it still struggles with consistency. It feels compelled to continue service on unprofitable routes, and has to deal with entrenched unions come negotiation time.

Air Canada investors are in for a choppy ride. It’s better to stick with Westjet, which is clearly the better operator.

Hotels

In Canada, hotels are an extremely fragmented business, consisting largely of franchisees operating under the banners of the large American chains, or operators who own one hotel.

There is one notable exception, InnVest REIT (TSX: INN.UN), which holds an interest in 124 different properties across the country, totaling some 15,500 rooms. These hotels are largely franchises operating under some of the biggest names in the business, such as Holiday Inn, Best Western, Delta, and Fairmont Hotels in Calgary and Edmonton. The majority of the portfolio is held in Comfort Inns located in Ontario and Quebec.

The company currently boasts a 7.7% dividend yield. The payout ratio exceeded 100% in 2013, but management is working on keeping expenses down, which should boost profitability. The company is also selling non-core assets, and is using the proceeds to renovate some of its flagship properties. The urban hotel market is tough, but InnVest owns some prime properties in terrific locations.

Investors looking for a little international exposure can look at American Hotels REIT (TSX: HOT.UN), which owns 32 hotels with over 2,600 rooms. It caters primarily to railroad workers, even going as far as putting heavy duty curtains in rooms to block out light and sound, allowing workers to sleep during the day. It has a generous dividend yield of 8.3%, a bunch of cash from its recent IPO, and a solid balance sheet.

Foolish bottom line

Travel is poised to be a growth industry for years to come. Investors looking to play the trend should look at the best operators they can find, since competition will continue to be fierce.

Airlines are an especially dicey business. Investors should stick with the best operator, which is Westjet. Air Canada is a fine airline to fly, but union influence and the previous bankruptcy make me nervous.

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Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

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