The Dividend-Paying 2-Bagger

What's better than a dividend stock paying better than twice the market average? An undiscovered small-cap stock with a proven leader at the helm. Even better, this company is poised to take advantage of the great values in real estate, the industry investors love to hate right now. But they won't always feel that way, and when real estate returns to favor, this company will be gushing an ever bigger dividend and will sit atop a pile of attractive assets.

Three great tastes together
What would your ideal stock look like? You'd want a security that had multiple ways to win, one that's in the sweet spot where massive outperformance resides: a great value, dividend-paying, and underfollowed.

Legendary investors such as Warren Buffett and Seth Klarman have shown the wisdom in value investing. Over the long term, value investing wins, because you can take advantage of the market's short-run thinking and psychological biases. And significant research has gone into showing why this investing style works.

And a value stock that pays a dividend that trounces the market? Sounds even better. Above-average dividend payers have been shown to provide attractive total returns over the long term, so you should love those quarterly checks.

Now, imagine combining the power of value and dividend investing with stocks that not everyone and their Aunt Sally knows about, such as small caps or what we call hidden gems. As I've shown here, such small caps may be followed by just one or two analysts, compared to dozens that follow the average megacap stock. Small caps can truly offer advantageous mispricing for individual investors like you and me. Because they're smaller, they can have huge opportunities to grow, something the big guys don't have.

Add them all together and you get Retail Opportunity Investments Corp. (Nasdaq: ROIC  ) , or ROIC, for short.

Meet the 'rents
ROIC operates as a real estate investment trust and its market cap sits at a modest $546 million, firmly in small-cap territory and just a lone analyst follows this REIT. ROIC is growing its portfolio quickly.

Under veteran real estate investor and CEO Stuart Tanz, ROIC is snapping up bargain-priced shopping centers on the West and East coasts like consumers at a Black Friday sale. Unlike mortgage REITs and dividend highfliers Annaly Capital (NYSE: NLY  ) and Chimera (NYSE: CIM  ) , which own interests in mortgage securities, ROIC actually manages its properties.

Tanz has a strong history in the industry and is a value investor himself. He built Pan Pacific Properties into a $4.1 billion company and earned early investors nearly 800% on their money in just 10 years, after selling out to Kimco Realty (NYSE: KIM  ) near the market top in late 2006.

By owning shares of ROIC, you have Tanz working as a value investor for your own portfolio. He's on the lookout for cheap retail property in populous and affluent areas, those with 100,000 or more people inside a five-mile radius making at least $60,000. Even better, because of his industry connections, he can snag the hidden real estate gems for himself (and us), the sweetest deals that aren't available to most investors.

Once he's acquired a property, Tanz invests in and beautifies it, increases occupancy, and then sells the property for a higher price. ROIC's shopping centers feature quality clients, including high-traffic grocery stores and other publicly listed companies that are frequently visited by consumers. In its most recent quarter, the company was still on the hunt, purchasing six locations and inking deals for two others.

And unlike much larger peers such as General Growth Properties (NYSE: GGP  ) , Weingarten Realty (NYSE: WRI  ) , and Vornado Realty (NYSE: VNO  ) , just a few acquisitions can dramatically increase ROIC's revenue. In other words, ROIC doesn't need to find that many sweet deals in order to double its revenue base of $43 million. Vornado and General Growth need several billion in additional rents, and Weingarten requires nearly $600 million. That's another advantage of focusing on small caps.

And what is all this worth? Motley Fool Income Investor advisor James Early pegs shares to be worth as much as $23 a stub -- a solid double from recent prices.

And as for that dividend? It stands at 4.3% now -- more than double what you'd find in the average S&P stock. But it's been growing furiously in the past 18 months, doubling since March 2010. ROIC's current quarterly dividend is just 46% of funds from operations (a REIT's measure of cash flow), meaning that there's still plenty of room to bump the payout at a substantial clip in the coming years as all those newly improved properties gush cash.

Tanz and ROIC have managed all this in the face of one of the worst economies in the last hundred years. But more is on the way. In fact, I'm so convinced by the massive opportunity in front of ROIC, that I'm going to put my own cash on the line, as the Fool's trading rules permit.

Foolish bottom line
If you like great stocks with dividends, consider ROIC along with the 11 names from a brand-new free report from Motley Fool expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. Get instant access to the names of these 11 high yielders -- it's free.

Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Chimera, Annaly, and Retail Opportunity Investments. Motley Fool newsletter services have recommended buying shares of Retail Opportunity Investments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (87)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2011, at 4:08 PM, akoffool wrote:

    How does a PE of 47 figure into this?

  • Report this Comment On December 08, 2011, at 4:39 PM, wicker44 wrote:

    akoffool

    you're going to use GAAP Net Income to evaluate a fast growing REIT that has close to a buck a share in free cash flow for 2011? Its trading at 10x-12x free cash flow, again fast growing free cash flow. Bit more reasonable eh?

    Good article-

  • Report this Comment On December 08, 2011, at 5:30 PM, Regarded49 wrote:

    Realty Income is better.....pays monthly and is over 5.2% yield, stable, has not missed a div in 48 years.

  • Report this Comment On December 08, 2011, at 5:30 PM, Regarded49 wrote:

    the symbol is "O"

  • Report this Comment On December 08, 2011, at 6:54 PM, TMFRoyal wrote:

    Hi, wicker44,

    You're right on. Looking at the 47 P/E doesn't tell you what this company is doing for the future. Its recently acquired properties will drastically grow revenues and it will continue to upgrade its properties and increase occupancy.

    Foolish Best,

    Jim

  • Report this Comment On December 09, 2011, at 12:43 PM, Becker2011 wrote:

    TMFRoyal, others,

    Revenue is growing, but would you / are you worried on how large these "gain on bargain purchases" are. I understand the accounting behind it - but in the end - the company gets to decide what the gain actually is (since fair value is involved). I'm not saying they are playing with these numbers unfairly (i don't know the industry that well), but just how is this included into your 2-bagger opinion?

    Thanks

  • Report this Comment On December 17, 2011, at 4:53 PM, paglidd wrote:

    Hi Jim,

    I've been researching this stock since reading your post, and was set to buy when I saw the recent downgrading of ROIC by Audit Integrity.

    That, plus Becker2011's comment above, cause me to ask if you see any yellow or even red flags in AI's move?

    Thanks,

    pg

  • Report this Comment On December 20, 2011, at 3:14 PM, Hawmps wrote:

    I like this pick, but I'm partial to commercial real estate because it's what I do and what I understand. Just glancing around the company web site http://www.roireit.net/ you can look at the actual shopping centers in their holdings and come up with some general conclusions. Just read the two lines below from their web site and you can get a feel for what they do.

    "Retail Opportunity Investments Corporation (“ROIC”) acquires stabilized grocery-anchored neighborhood and community shopping centers located on the east and west coasts. ROIC also pursues grocery-anchored, value-add assets that offer repositioning opportunities and lease-up/re-tenanting potential."

    So, they look for good properties with strong, stable anchors but have probably been struggling with vacancies from smaller retail units at the center or sub-anchors. When looking at the shopping centers on the website they show you current occupancy and I like that. When I see centers with 19 units and 13 vacant, or 34 units and 13 vacant, or 38 units and 18 vacant, I see a company that is purchasing properties at a steep discount because of these vacancies, which is temporary. This is opportunity and they also have other properties with 95% occupancy or better to help manage newer acquisitions that need to have tenant improvements and get leased up. I see them leasing up to stabilized occupancy at these centers over the next two to three years and then you can start to watch the cash, flow, and equity in the assets grow as mortgages amortize and increasing the value of the assets through leasing activity. They are also likely getting some really good deals on financing right now too which will help keep costs down while vacancies are filled.

  • Report this Comment On December 23, 2011, at 6:14 AM, FoolishKwai wrote:

    "Even better, because of his industry connections, he can snag the hidden real estate gems for himself (and us), the sweetest deals that aren't available to most investors."

    The above is a huge red flag for me. It makes me feel like you're making your pitch based on your "inside man" that can get prices "nobody else can".

    Feels slippery to me.

    Anyone with real estate to sell is not going to do it in a back alley with a guy he knows for a price under what the market will bear.

    Care to explain further?

    Kwai

  • Report this Comment On January 10, 2012, at 7:39 PM, Hawmps wrote:

    Kwai,

    In the world of commercial real estate, there are often deals done that are not "listed" by traditional means. Brokers typically have pools of "qualified" investors (guys like Tanz) that they work with regularly and they are frequently coming across instances where a deal must get done.

    Let's say ABC Fund has a portfolio of 40 shopping centers and 6 of them aren't performing to expectations with something like 50% vacancy or whatever and they need to find a buyer for at least 3 of those porperties because ABC Fund is looking at liquidity problems in about 12 months. People like Tanz that have proven that they know a thing or two about a thing or two, and brokers know that they have the cash (or equivalent) to make the deal, have phones that ring with potential deals waiting on the other end when they wake up in the morning.

  • Report this Comment On January 24, 2013, at 8:54 AM, AllenBoyce wrote:

    So now it's more than a year later. Double bagger? No. Dividend increase? Up a whopping 2 cents/qtr. Recently downgraded.

    Prediction? Fail.

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