This Unique Real Estate Investment Offers a Growing Yield of 5.1%
Top Dividend Growth Stock to Consider
Today’s chart highlights a unique investment in the real estate sector. The company doesn’t make headlines very often, but it offers a rising stream of dividends and is well positioned to deliver strong growth for years to come. Let me explain.
The company in question is STAG Industrial, Inc. (NYSE:STAG), a real estate investment trust (REIT) headquartered in Boston, Massachusetts.
For those not in the know, REITs are giant landlords. A REIT may own tens, sometimes hundreds, of real estate properties, and collects rental income from the tenants. Then, these REITs pass most of their profits to shareholders in the form of dividends.
For real estate investors, there are many types of properties to choose from, such as retail malls, apartment complexes, and office buildings. As a result, there are also REITs focusing on specific types of properties. The most well-known REITs in today’s stock market tend to own retail shopping centers and office buildings.
STAG Industrial, on the other hand, offers investors a unique opportunity with its special focus on single-tenant, industrial properties. You see, many investors, including large institutions, are interested in retail and office space. As a result, the prices of retail and office real estate have already been bid up, meaning if you enter the market today, chances are you won’t be able to lock in a good return.
That’s why STAG Industrial is special. Unlike most other types of properties, single-tenant industrial properties don’t have a large following among institutional investors. As a matter of fact, the market for these properties is highly fragmented, with the largest investor controlling less than three percent of market share. (Source: “Investor Presentation Fall/Winter 2017,” STAG Industrial, Inc., last accessed December 15, 2017.)
At the same time, single-tenant industrial properties also aren’t that popular for small investors. These properties have an average cost of between $5.0 million and $15.0 million, which is not cheap. Moreover, a single-tenant building is ether fully occupied or completely vacant, meaning there could be high potential volatility in cash flows.
Due to the lack of investor interest, single-tenant industrial properties can be bought at relatively low prices, which would then translate to a higher return on cost. In the third quarter of 2017, STAG Industrial acquired 10 buildings, totaling 2.3-million square feet, at a weighted average capitalization rate of 7.5%. (Source: “STAG Industrial Announces Third Quarter 2017 Results,” STAG Industrial, Inc., November 2, 2017.)
As of September 30, 2017, the company’s portfolio consisted of 347 buildings located across 37 states. They are leased to 301 different tenants, with a well-laddered lease maturity schedule.
By diversifying across geography, industry, tenancy, and lease term, STAG Industrial can mitigate the correlation and binary risk associated with single-tenant properties. With a much less volatile cash flow risk profile, the company can pay a steady dividend.
The chart below shows the REIT’s distribution history since 2012:
STAG Industrial Dividend History
Source: “Dividends,” STAG Industrial, Inc., last accessed December 15, 2017.
In 2012, STAG Industrial paid total dividends of $1.07 per share. This year, it’s paying $1.4050 per share; that’s an increase of 31.3%.
Furthermore, because of the REIT’s ability to earn a monthly rental income, it has increased its payout frequency. In 2013, STAG Industrial switched from paying quarterly dividends to paying monthly dividends. And with a monthly dividend rate of $0.1183 per share, the company offers an annual dividend yield of 5.1%.
While there are plenty of higher-yielding stocks in today’s market, STAG Industrial stands out due to its impressive dividend growth. And with a unique investment strategy, the company will likely continue its track record of delivering oversized returns to income investors.