Dividends Matter – Don't Get Duped (Part 1)

I’ll admit that, most days, I take for granted that anyone reading my articles – whether regular readers or first-timers – has at least some interest in buying dividend stocks.

So I was certainly schooled on December 28 after publishing “5 Dividend Growth Stocks to Help You Sleep Like a Baby.” That’s where Vincent1966 commented:

“There is absolutely no research whatsoever supporting the notion that investors should seek out so-called ‘dividend growth’ stocks. Investors will achieve higher returns by ignoring dividends and the psychological satisfaction they provide. Dividend investing is the greatest popular delusion of our time.”

I was pretty surprised by that, especially considering how the opposite of dividend stocks – the kind of companies you find on the Nasdaq – did so poorly last year. While the Dow fell about 9% in 2022 and the S&P 500 lost around 20%…

Their tech-heavy alternative absolutely tanked, erasing a third of its value. Big names like Apple (AAPL) and Microsoft (MSFT) still managed to “beat” at -28%. But Alphabet (GOOG) dropped 40%, and Amazon (AMZN) fared even worse at -50%.

Then there was Meta Platforms (META) and Tesla (TSLA), both of which tanked 65%.

All told, big tech lost trillions in market value. So what’s with picking on dividend companies?

Dividend-Paying REITs Didn’t Do Too Hot, Either

Let me stop anyone rushing to say how poorly my precious real estate investment trusts (“REITs”) did last year…

The sector, known for its safe, higher-dividend yields, didn’t perform well in terms of share price appreciation. To quote Seeking Alpha at the close of the year:

“Equity REIT returns saw the steepest decline [in 2022] since the great financial crisis, with the FTSE Nareit All Equity REITs index decreasing by 27.46% in value…

“The index had declined by 41.12% in 2008 and 19.05% in 2007, but had largely posted an increase in value in the following years. In 2020, the year of the onset of the Covid-19 pandemic, the index had seen a decline of [merely] 8.40%.”

Certain REITs even tanked every bit as badly as big tech.

Take office landlords Douglas Emmett (DEI) and SL Green Realty (SLG). They plunged 55% and 57%, respectively. And the latter might cut its dividend soon.

Again.

But overall, REITs did and will continue to pay out as promised. Those dividends are a very big deal, despite what some may say, as recently verified by world-renowned financial firm Charles Schwab:

“Dividends, when reinvested, can significantly boost total returns over time, making dividend-paying stocks an attractive option for older and younger investors alike.

“For example, if you invested $1,000 in a hypothetical investment that tracked the S&P 500 Index on January 1, 1990, but didn’t reinvest the dividends, your investment would have been worth $11,687 as of September 2022. If you had reinvested the dividends, you would have ended up with just over $20,000 – nearly double.”

It then includes this chart:

How about that for “proof”?

The “Proof” Is in the (Right) REIT Pudding

I put “proof” in quotation marks above because I can already imagine a few skeptical responses. So let me acknowledge the fine print below the previous chart:

“Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.”

There’s that for starters. I’ll also fully admit – in fact, flat-out promote – the fact that there are dividend-paying stocks that aren’t worth their weight. This includes some REITs.

And another thing to note: In order to make the most out of the data shown, you need to invest wisely. Buying any kind of stock at unsustainable prices is a good way to lose money over the short-term and minimize your long-term profit potential.

In addition, speaking of the short term, let’s face it… investing in growth stocks can pay enormously more over a period of months or a few years than dividend stocks can pay in a lifetime. If you choose the right company…

And get in at the right time…

And stick through any subsequent volatility to get out at the right price…

There are investors who have done that, admittedly. But they’re not the norm.

So, if you consider your life to be luck-kissed, go ahead and ignore well-placed, well-priced dividends. More power to you!

I mean it. There’s no sarcasm meant there. I truly wish every sincere investor the best.

But considering what happened when I ignored dividend-paying assets a decade and a half ago, I know I’m pretty average in the luck department. So I’ll stick with the evidence I see that long-term dividend-stock strategies really can work.

Since I put my money where my mouth is, I’m living proof of their power myself.

Take These 3 REITs to the Bank

REIT #1 – American Tower Corporation (AMT)

Everything these days seems as if it is connected to data in some shape or form. Consumers access this data largely through the major telecommunication giants like Verizon (VZ), AT&T (T), or T-Mobile (TMUS).

However, these major telecom providers battle hard by subsidizing phones in order to gain customers, and the increased competition has eaten into margins.

Now I like Verizon, as they are very well run, but instead of looking at the telecom providers, why not look at the infrastructure behind these telecom providers?

I introduce to you, American Tower, which is the premiere Cell Tower REIT. They build cell towers which are then leased by these telecom companies.

Some are individually leased, whereas some towers have multiple tenants on them. The capex is generally the same whether there is one or three tenants, but the margins for AMT change drastically.

Here is how different the ROI is for AMT when they are able to add tenants to their towers.

The rollout of 5G is still in its early innings and the telecom companies have been spending billions in order to strengthen their coverage. 5G is ultra fast, but the data does not travel very far, which bodes well for a company like American Tower.

American Tower is the dominant player in the space with a market cap of $101 billion, far outpacing its closest competitor in Crown Castle (CCI), which has a market cap of $63 billion.

Over the past 12 months, shares of AMT have been under pressure falling 17%, largely due to rising interest rates. Even with the rising rates, we find there to be plenty of opportunity with the company as they provide a nice yield and strong dividend growth.

AMT currently pays an annual dividend of $6.24, which equates to a dividend yield of 2.9%. The dividend is well-covered with a low payout ratio of 54%, providing plenty of room for continued dividend growth.

In addition, the company continues to generate strong free cash flow, which has grown at an average annual rate of 16% over the past five years.

This strong free cash flow has allowed AMT to increase their dividend at a much faster clip than investors generally see within the REIT sector. Over the past five years, the company has increased their dividend at an average annual rate of 18%, making them a dividend growth REIT.

Given the pullback we have seen in the shares, investors can pick up shares of AMT for 22x, which is below their 5-year average of 25.6x.

At iREIT on Alpha, we currently rate shares of AMT a BUY.

REIT #2 – Agree Realty Corporation (ADC)

When investors think of net lease retail REITs, the first name that pops to mind is Realty Income Corporation (O), and with good reason. For years, Realty Income, otherwise known as “The Monthly Dividend Company” has been the gold standard for the space.

They are still a great REIT, one we continue to like, but there are some other gems within the same net lease retail space. One that we are going to highlight today is Agree Realty.

Being that they operate in the same sector as Realty Income, you will come to find that their structure is very similar as well. Many of the leases that they enter into are what are called sales-leaseback transactions.

This type of transaction is where the company can purchase a property from the prior owner, who does not move out and instead leases the building from the new owner (ADC now). This frees up cash for businesses and does not interrupt operations.

This can be a great advantage for a company like ADC, or O for that matter. They are able to get a look into the business, determine the strength of the business before not only buying the property but leasing it back to the prior owner.

ADC takes pride in the strength of their portfolio of properties and with the tenants in which they do business with. Here is a look at the company’s top tenants.

As you can see, a lot of familiar names throughout, such as Walmart (WMT), Tractor Supply (TSCO), Dollar General (DG) and many other large companies. ADC focuses on quality when it comes to tenants, which is evidenced by nearly 70% of their annual base rent coming from investment grade tenants.

This is a very close comparison and essentially the blueprint that Realty Incomes has laid out that has been so successful for many years.

In terms of the dividend, ADC pays an annual dividend of $2.88 per share which equates to a dividend yield of 4.1%. The dividend has been increased for 10 consecutive years and like O, ADC also pays a MONTHLY dividend.

Looking at valuation, shares of ADC currently trade at 18.4x next year’s AFFO estimate, which is actually higher than that of Realty Income. Over the past five years, ADC shares have traded at a multiple closer to 20.6x.

Not a huge discount right now, but Agree Realty definitely is a name to have on your radar barring any near-term pullback.

REIT #3 – Mid-America Apartment Communities, Inc. (MAA)

Apartment REITs have been under siege over the past 12 months, and Mid-America has been no different.

Over the past 12 months, here is a look at the performance of four of the largest apartment REITs: Equity Residential (EQR), AvalonBay Communities (AVB), Mid-America, and Essex Property Trust (ESS):

As you can see, three of the four REITs are down over 30%, with the exception being MAA, which is down 28% over the past year.

AVB and EQR are the two largest REITs in the space, but over the past five years, MAA has led the charge in terms of performance. To be honest, it has been a one-horse race. MAA shares over the past five years are up 64%, meanwhile, the next-closest apartment REIT shares are down 6%.

Mid America’s focus is more on the sunbelt region, which is different from the large players like AVB and EQR, who mainly focus on the large coastal states like New York and California.

All of the top 10 markets for MAA are located in the sunbelt region.

Atlanta, Dallas, and Tampa all make up nearly 30% of the company’s annual base rent. This has been a plan for the company, as they have migrated over the years more to this sunbelt region, essentially going all in on this region of the country, which has certainly played out quite well thus far.

In addition to a great portfolio of properties, they also have built a strong balance sheet with an A- credit rating.

The company pays an annual dividend of $5.60 per share, which equates to a dividend yield of 3.5%. The company has increased the dividend for 12 consecutive years now.

Looking at valuation, MAA shares currently trade at 18.8x 2023 AFFO estimates, which is below their 5-year average of 21.6x.

At iREIT on Alpha, we currently rate shares of MAA a BUY.

Dividends Matter – Don’t Get Duped

Dividends are extremely important to investors, and I believe that many readers don’t truly grasp the significance of dividends and the impact to their retirement portfolio.

Accordingly, I plan to publish a series of articles on this topic, because I believe that dividends matter so much more now (thanks to high interest rates and a looming recession).

It seems that the chase for yield has intensified to a level in which investors are beginning to ignore the fact that dividend growth is arguably the most important reason to own a stock (second to valuation).

Stay tuned for future articles, and last but not least, “don’t get duped.”

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in”- John D. Rockefeller