Today, we put the spotlight on one of the market’s hidden gems: the self-storage industry.
Americans, it seems, have too much stuff. The U.S. has five times more storage facilities than Starbucks cafes. And each day, the industry adds four to five more properties just to keep up with demand.
That has created quite the opportunity for investors. Shares of three of the biggest players in the industry—CubeSmart (NYSE:CUBE), Extra Space Storage, Inc. (NYSE:EXR), and National Storage Affiliates Trust (NYSE:NSA)—have delivered triple-digit returns over the past few years. For income hunters, many of these names have turned into reliable sources of dividends.
One of my favorites is Public Storage (NYSE:PSA). The company built its first self-storage facility in 1972. Today, the company owns a sprawling empire of properties across Europe and the United States, totaling some 142 million square feet of real estate.
You can’t find a simpler business. The customer sends the storage company a check each month. In return, the company gives the customer a key to an empty unit.
For investors, this has created a reliable stream of income. Public Storage has paid out a dividend to common shareholders every year since 1981. Today, the business pays out a quarterly distribution of $2.00 per share, which comes out to an annual yield of 4.2%.
For Income Investors, though, I’m looking at the preferred shares. Last year, management came to the market with a $300.0-million issue of Public Storage Depositary Shares (NYSE:PSA-PG). Executives plan to use the proceeds to fund the company’s expansion efforts.
The higher yield represents the biggest advantage here. These Public Storage preferreds pay a quarterly distribution of $1.26 per unit, which comes out to an annual yield of 5.5% at the time of this writing. And because these payments are fixed, owners don’t have to worry about a volatile income stream.
We get more safety here, too. Executives have to pay the full distribution to preferred share owners before regular stockholders see a dime. In the event of a bankruptcy, preferred owners stand first in line to get paid. Such an outlook, though, looks unlikely. Public Storage has a bulletproof balance sheet, with nearly no debt. The business also stays pretty consistent throughout the cycle, and it’s one of the best-managed operations in the industry.
The biggest possible downside here? Higher interest rates. As yields rise, new issues will offer bigger payouts. The price for older preferred shares like Public Storage will have to drop in order to compete with new securities.
That said, I don’t like to time the market. My approach is to dollar-cost average my investments, picking up high-quality investments over time. If interest rates rise and prices drop, I get to buy more of my favorite investments for even higher yields.
As long as you understand that risk ahead of time, you don’t have much to worry about.