Prologis (PLD 0.69%) stock trades about 25% below its three-year high-water mark. Digital Realty (DLR 0.95%) trades about 15% below its three-year peak. But when concerns about interest rate increases were more top of mind in late 2022 and 2023, these two dividend stocks were trading down more than 40% from their highs.
Value-focused investors will probably see this situation and think they missed out. However, another stock market sell-off would likely bring renewed opportunity.
There's almost always a second chance
Mr. Market is fickle and often swings between enthusiasm and pessimism (sometimes for no apparent reason). While it can be hard to step in and buy stocks when Wall Street is in the dumps, it is often the period when the best deals can be found. For instance, it was a great time to buy real estate investment trusts (REITs) when interest rates were heading sharply higher. Now, as the mood around interest rates has become more sanguine, REITs are recovering.
That's the big story behind the 40%-plus stock price declines at Prologis and Digital Realty that have now been materially pared. They are both very good companies with solid long-term outlooks. However, Mr. Market's mood could quickly turn negative again, especially if there's a broader sell-off. If that were to take place, Prologis and Digital Realty could once again be attractively priced. It's worth keeping this pair on your wish list. Here's why.
Prologis has three important growth drivers
Prologis is one of the largest warehouse owners in the world, with a portfolio spread across four continents. The dividend yield today is around 2.8%, but it was up around 3.5% or so not too long ago. A return to that level would make this stock very appealing. Furthermore, the dividend has been raised every year for a decade. And the annualized rate of increase over the past 10 years was roughly 11%. Warehouses are pretty boring assets, but they are vital to world trade, with Prologis' portfolio strategically located in some of the most important global transportation hubs.
There are three things to like here over the long term. First, Prologis is a giant REIT, sporting a market cap of roughly $120 billion. That gives it the scale to be an industry consolidator. Second, warehouse rental rates have increased significantly in recent years, allowing Prologis to roll over expiring leases at much higher rates. That process has yet to run its course, so more rent growth is on tap in the near term. Third, Prologis has a lot of vacant land in its portfolio on which it can build new warehouses. Management estimates this is a $40 billion long-term opportunity.
If there's a broad market sell-off that takes Prologis down with it, you'll probably want to jump at the chance to buy it.
Digital Realty provides the backbone for the data center beast
Digital Realty's yield is roughly 3.2%. When the stock was at its nadir in 2023, the yield was well over 5%. If a broad market decline brought the yield back toward that peak, it would represent a very attractive buying opportunity. The dividend has been increased annually for an impressive 18 years.
The core story here is the increasingly interconnected world, which relies on the types of data centers that Digital Realty owns. The REIT's portfolio is global, with over 300 assets spread across North America, South America, Europe, Asia, and Africa. Although demand can wax and wane, the business seems to be on a fairly strong footing today. In the fourth quarter of 2023, management noted that its backlog was at a record and that renewal leases were being signed at the highest levels since 2015. But the real attraction here is the fact that the world is getting more digital over time, and artificial intelligence is only likely to help push demand even higher.
All told, Digital Realty is a reliable dividend stock with a long growth runway ahead of it. A return to recent lows would be an opportunity that you probably wouldn't want to pass up.
Make your wish list now
There's no way to know when Mr. Market's mood will turn for the worse. And when it does, investors will likely be selling indiscriminately. It can be hard not to follow the crowd during times like that, but if you prepare ahead of time by creating a short list of stocks you'd like to own if only they were cheaper, you'll have a better chance of acting on the opportunities in front of you. Reliable dividend growers Prologis and Digital Realty are two names that should probably be on your wish list given the strong fundamental growth opportunities ahead of them.
