I was recently reading a column in Barron’s by Randall W. Forsyth, where he wrote:
“History may be about to repeat, with the Fed about to belatedly tighten policy, just as the economy slows.”
Here’s another part:
“It was a lot more fun to be in your 20s in the ‘70s than to be in your 70s in the ‘20s… I don’t actually associate the 1970s with fun, but rather prices running ahead of my paycheck, or queuing in gasoline lies on odd or even days, of not having enough cash for the items in my shopping cart, and of living in Brooklyn because it was cheap long before it was chic.”
That really hit home for me, both figuratively and financially. Admittedly, back in the ‘70s, I wasn’t old enough to collect a paycheck. But I do remember the difficulties my single mother had with putting food on the table and gas in the station wagon.
At that time, she was working two jobs and doing everything she could to provide the bare necessities. Somehow, someway, she usually managed to have a little left over for some fun things as well, like enrolling me in the Boy Scouts.
It’s been over four decades since that level of inflation – and stagflation – reared its ugly head. So in many ways, those days are just distant memories.
But not in others. I can now fully grasp some of the struggles my mother encountered.
These days, I find myself cutting back on Starbucks (SBUX) lattes and other splurges.
That seems trivial, I know. And it is. But there are plenty of other financial corners we’re all cutting these days in order to afford actual living expenses – which just keep going up.
I’ve appreciated my mom’s efforts all those years ago for a very long time. But this new level of recognition makes me want to pay her back even more.
The same goes for all of you other hardworking parents and grandparents out there navigating these tough times. That’s why I’m providing this list of three exceptional dividend-growth stocks that should perform well in this environment.
Of course, I’m going to write about real estate investment trusts (REITs) since that’s my wheelhouse. Plus, there’s an added advantage I’ll tell you about later.
But first, remember that dividend-growth investing helps you combat inflation by growing your passive dividend income.
Inflation on the surface isn’t automatically bad, believe it or not. It can simply be a sign of the rising costs of goods and services.
And if you’re a company, these rising costs can fuel the growth that also drive dividends.
Let’s test the theory with Starbucks…
Starbucks had 53 locations in 1992 when it went public at $17 per share. But let’s skip ahead about a decade.
The price of my favorite drink, a grande cafe latte, was just $2.85 in 2001.
Starbucks was then trading at around $5, and adjusted earnings in that year were $0.14 per share.
These days, the very same latte sells for $4.25, a 49% increase over 2001… and the very essence of inflation.
Yet Starbucks’ revenue and profits also went up, as has its dividend. As seen below, it wasn’t paying any such thing until 2010. But over the last decade or so, the company has grown its dividend by 30% CAGR.
Even over the last four years – including through a global pandemic – it’s grown its dividend by around 15% CAGR.
So how about the kind of companies that are often its landlords? To see how that works, let’s move over to REITs to see how they fare.
We’ll use the made-up XYZ Net-Lease REIT, which owns a portfolio of properties leased to Starbucks. As such, that tenant is responsible for paying all the “triple-net” costs, which include taxes, insurance, and maintenance costs.
Snow removal… sweeping… trash removal… property taxes… insurance: They’re all paid by Starbucks in this scenario.
One common misconception with net-lease REITs is that they can’t keep up with inflation. However, that’s just a myth.
They have annual built-in rent escalators of 1.5%-2% per year. And they also have longer-duration debt, so they can essentially lock in their investment spreads.
Besides, remember growth has its advantages for REITs…
Today, Starbucks – which has around 9,000 company stores and 6,500 licensed stores – has a fairly mature business model. So it has to create growth through operations and brand-extension strategies.
Alternatively, REITs can continue growing their portfolios in highly fragmented marketplaces… where just one out of 10 U.S. commercial properties are owned by these entities.
That’s a lot of room to roam!
Another great advantage for most REITs is that they provide natural protection against inflation. After all, real estate rents and values tend to increase when other prices do.
That’s partially because many leases are tied to inflation. This supports REIT dividend growth and provides a reliable stream of income regardless, helping to support the following fact…
That, in all but two of the last 20 years, REIT dividend increases have outpaced inflation as measured by the Consumer Price Index.
And you don’t have to take my word for it. The chart below illustrates dividend growth per share compared to the annual inflation rate.
In 2002, dividend growth failed to edge out inflation by just half a percentage point. But the only other time in recent history that happened was just after the financial crash in 2009.
Over the larger 20-year period, average annual growth for dividends per share was 9.6% (or 8.9% compounded) – compared to only 2.1% (2.2% compounded) for consumer prices.
But wait! There’s more…
The real secret to riding out inflation is to own dividend stocks that also benefit from price appreciation, or total return. This means that mom (or dad) won’t have to worry about $4.00-per-gallon gas.
She (or he) can sit back and do precisely what John D. Rockefeller did: enjoy company payouts. While he might have been being a little hyperbolic when he said “the only thing that gives me pleasure” is “to see my dividends coming in”…
There really is nothing else quite like it in the world.
My first REIT for mom is VICI Properties, a gaming REIT that is simply being ignored by Mr. Market. As the company’s CEO, Ed Pitoniak told me recently,
“… the short interest that everyone has seen in VICI going back to last March when we raised the equity for Venetian and then even more so as we raised the forward equity for MGP in early September, the way forward equity works is that the investment banks who issue our equity, the investment banks go into the market and they borrow a share which technically means they're short. They take the borrowed share and they give that borrowed share to those who've participated in the equity raise.”
So that explains the large short position.
In just a few weeks VICI should be closing on the MGM Properties (MGP) portfolio that will add another 15 properties to the current 28 property portfolio. This transformative deal will enhance VICI’s geographic and tenant diversification, that should also result in an upgrade to investment grade (later in the year).
There are 15 analysts that cover VICI and 14 have Buy ratings and the average growth estimate for 2022 is ~6%. Shares are now trading at $28.67 with a P/AFFO of 14.6x and dividend yield of 5.4%. VICI’s equity yield is 6.9% which means new investors are getting a bargain to buy this basket of trophy casino assets.
I like mom’s odds here, and also recognize that the lease contacts are CPI-based, so the landlord has optimal pricing power. iREIT is forecasting shares to return ~25% over the next 12 months.
Our next pick for mom is CareTrust, a healthcare REIT focused on skilled nursing (71%), multi-service campus (16%) and senior housing (13%).
The company owns 224 properties (23,421 beds) in 27 states (as of Q4-21) and has maintained low leverage 3.7x (flat Q/Q) vs. a 4.0-5.0x target and net debt to enterprise value was 23% (as of Q4-21).
In Q4-21 CTRE FFO grew FFO by 9% over the prior year quarter to $37.3 million and normalized FAD grew by 11.5% to $39.8 million. Shares are attractive (trading at $18.63) with a P/AFFO of 12.5x (normal is 14.4x) and dividend yield of 5.9%.
Once again, I think mom will like this pick, recognizing that the payout ratio is one of the lowest in the healthcare sector, and also the company has done a great job of increasing the dividend – even during a global pandemic.
There are eight analysts that cover CTRE and six have BUY ratings and the average growth estimate for 2022 is 9%. We forecast shares to return ~25% over the next 12 months.
Our final pick for mom is Realty Income, better known as “the monthly dividend company”. My colleague Dividend Sensei did a great job of breaking down the company (his article is HERE) and I also want to highlight a new proposed acquisition in Boston.
A few weeks back the company said it was acquiring the Encore Boston, a trophy Wynn property that cost $2.6 billion to build. However, Realty Income is buying it for $1.7 billion, far below replacement cost, and that equates to a 5.9% cap rate for a Class A property.
In other words, Realty Income is literally printing money right now, with a WACC (weighted average cost of capital) of around 4%, the investment spreads for buying trophy assets is just under 200 bps.
But wait, Realty Income has also closed on a $16 billion (enterprise value) deal with VEREIT, and seamlessly integrated the 3,800 properties into O’s 6,600 properties, while also spinning (de-risking) the office properties.
As a result, the balance sheet is stronger, the sources of income are stronger, yet shares are trading below the price when Realty announced the merger with VEREIT.
There are 15 analysts that cover O and 10 have BUY ratings and the average growth estimate for 2022 is 9%. Shares are now trading at $66.58 with a P/AFFO of 18.1x and dividend yield of 4.5%.
As I explain to mom, Realty Income is like a CD that pays around 4.5% with a nice kicker – our forecasted total return target is 20% over 12 months.
I didn’t coin the phrase – the safest dividend is the one that’s just been raised – but I certainly believe there’s powerful meaning to a dividend bump.
First off, it sends a signal from management to shareholders that interests are aligned and also that the company is in a position to reward investors.
Secondly, it demonstrates the fact that earnings are growing, and it validates the discipline of the management team.
Of course, I’m not talking about the one hit wonders, that raise the dividend once, just as a head fake, and then ceases to do so.
Instead, I’m referring to the exceptional companies that are committed to sustainable dividend growth, because we all know that the ultimate way to build wealth is to invest in the highest quality dividend paying stocks.
I think mom will like these picks and hope you do too!
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This article was written by
Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.
Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley).Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.
Disclosure: I/we have a beneficial long position in the shares of SBUX, O, VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.