Why I’m Digging This Dividend Stock
It cannot be denied that e-commerce has been one of the fastest-growing industries over the past decade. But for the most part, the segment wasn’t really a focus for dividend investors. The reason was obvious: if you look at the most popular e-commerce stocks, you’d see that none of them pay a dividend.
So, does that mean income investors have to miss this profit train?
Not necessarily. For those willing to do the research, it’s possible to find dividend-paying companies that can give investors exposure to the e-commerce boom.
STAG Industrial Inc (NYSE:STAG) happens to be one of them.
An E-Commerce Play You Likely Haven’t Thought Of
Headquartered in Boston, Massachusetts, STAG Industrial is a real estate investment trust (REIT) that owns, operates, and acquires single-tenant industrial properties in the Unites States.
Now, you may be wondering: REITs are basically large landlords, so how can they be worth considering for investors eyeing the returns of the e-commerce business?
Well, the answer is actually quite simple: STAG Industrial has a portfolio of warehouses and distribution centers. These properties are nothing fancy, but they can play a key role in the e-commerce ecosystem.
In fact, the last time you bought something online, the product will likely have spent some time in a warehouse and then gone through a few distribution centers before arriving in your mailbox.
Note that, for an online-only vendor, there’s no brick-and-mortar storefront. So unless the vendor operates out of the owner’s home, chances are it needs warehouse space to store its inventory. And as the e-commerce business takes off, the demand for warehouse space could get a serious boost.
The boom is already happening. According to one insider, “Demand for industrial in the U.S. is off the charts,” and that the market for warehouses “is completely on steroids.” (Source: “Ecommerce delivers warehouse gold rush,” Financial Times, December 26, 2018.)
Rising demand means companies looking for warehouses will bid up the rental prices. With a large portfolio of these properties, STAG Industrial Inc is well positioned to collect higher rental income down the road.
And don’t forget that if the company wants to maintain its REIT status, it must pass at least 90% of its profits to shareholders through dividend payments. Therefore, as STAG Industrial grows its financials, shareholders can look forward to earning bigger dividend checks in the future.
In fact, that’s something we are already seeing with STAG stock today. Consider that in 2012—the first full calendar year after STAG Industrial’s initial public offering (IPO), the company declared total dividends of $1.07 per share. By 2018, that amount had grown to almost $1.42 per share, translating to a total increase of 32.7%. (Source: “Dividends,” STAG Industrial Inc, last accessed March 28, 2019.)
What’s just as impressive was that, in 2013, STAG Industrial switched from paying quarterly dividends to monthly dividends. So rather than waiting three months between two dividend checks, shareholders are now getting paid every single month.
With a monthly dividend rate of almost $0.12 per share, STAG stock offers investors a generous annual yield of 4.9%.
Maintaining a Safe Payout (Every Month)
If you are wondering whether this yield—which is twice as large as that of the average S&P 500 company—is actually safe, a look at the company’s financials should be reassuring.
In the fourth quarter of 2018, STAG Industrial Inc generated core funds from operations of $0.46 per diluted share. The amount not only represented a 4.5% increase year-over-year, but also easily covered its three monthly dividends totaling $0.35 per share declared during the quarter. (Source: “STAG Industrial Announces Fourth Quarter and Full year 2018 Results,” STAG Industrial Inc, February 13, 2019.)
In full-year 2018, the company’s core funds from operations came in at $1.79 per diluted share, marking a 5.3% improvement from the prior year. And since STAG Industrial declared total dividends of almost $1.42 during the year, it achieved a payout ratio of 79.3%, indicating that there was a sizable margin of safety.
Most importantly, the company has a real estate portfolio that’s capable of generating oversized cash flows. As of December 31, 2018, STAG Industrial’s portfolio consisted of 390 properties totaling 76.8 million rentable square feet. These properties are leased to more than 300 tenants in 37 states. The portfolio boasts a strong occupancy rate of 95.5% and had a weighted average lease term of 4.9 years. (Source: “Corporate Overview,” STAG Industrial Inc, last accessed March 28, 2019.)
Bottom Line on STAG Industrial Inc
Last but certainly not least, because STAG stock is considered an income investment, it could be more resilient than the high-flying e-commerce pure-plays in the event of a market sell-off. For instance, despite the recent market recovery, Amazon.com, Inc. (NASDAQ:AMZN) stock is still down 11.9% since last October. STAG stock, on the other hand, has climbed 8.3% during the same period.
Of course, the flip side is that, as a dividend play, STAG Industrial stock probably won’t shoot through the roof anytime soon. Still, if you are an income investor who wants a relatively safe way to tap into the growth potential of the e-commerce industry, this real estate stock looks like a solid opportunity.