1 Great Dividend You Can Buy Right Now

Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.

This week, I'd like to turn your attention back to the residential real estate investment trust sector and highlight why Equity Residential (NYSE: EQR  ) is a great income-producing stock you can trust moving forward.

A reason to worry?
Last week was certainly a transformative time for the housing sector. The Federal Reserve has, for years, been using monetary easing -- its latest round includes $85 billion worth of monthly bond purchases, including long-term U.S. Treasuries and mortgage-backed securities -- to drive down long-term lending costs for consumers and enterprises. The Fed's justification was to entice banks, consumers, and businesses to take on debt to expand their businesses and increase consumption. We knew that this easy money wasn't going to last forever, and last week the Fed hinted that its bond-buying program, known as QE3, could be pared back or halted before the year is over.

While this is good news from the perspective that the Fed thinks the market is strong enough to move forward without any additional stimulus, it's terrible news for the housing sector, which has relied on low lending rates to drive loans. It's no surprise that last week was the worst one we've witnessed in the housing sector in more than a year -- especially for homebuilders still on the shakiest of ground, like Beazer Homes (NYSE: BZH  ) . Beazer, which is still losing money on an annualized basis, fell 10% on the week, despite seeing its revenue surge 50% in its most recent quarter.

Everything's peachy for residential REITs!
However, what terrible news exists for homebuilders could turn into fantastic news for the residential-REIT sector. You see, if lending rates begin to rise because the Fed is paring back its bond purchases, then it will remove the consumer incentive to purchase a home and will drive people back into renting -- which is great news for the big three residential REITS: Equity Residential, AvalonBay Communities (NYSE: AVB  ) , and UDR (NYSE: UDR  ) .

Source: Dan DeLuca, Flickr.

In the most recent quarter for all three companies, we saw economic occupancy and rental rates rise noticeably. In the case of Equity Residential, we saw net operating income jump 6.1% as rental rates drove revenue higher by 5%. Equity Residential's portfolio also ended the quarter with a high occupancy rate of 95%. Similarly, AvalonBay delivered a 0.2% increase in economic occupancy in the first quarter, with rental revenue in established communities rising 4.9%. UDR rounded out the strength in this sector with rental revenue growth of 5.4% in the first quarter, even though occupancy rates came in flat at 95.5%. These results speak to one important fact of the residential-REIT sector: All three have incredible pricing power. With so few vacancies on the market and lending rates rising, that's only going to increase the amount of rental pricing power that these three names can wield.

Another important aspect that can't be ignored is just how important the Archstone purchase will be for both AvalonBay and Equity Residential. Equity Residential paid close to $1.5 billion for a minority stake in Archstone, with AvalonBay picking up the tab for the remainder. Normally, residential REITs like Equity Residential and AvalonBay issue shares or take on debt to construct new apartment complexes. A deal like this will allow both companies to absorb Archstone's existing communities and add to their funds from operations almost immediately.

Show me the money, Equity Residential
If it's not enough to spur your interest to know that Equity Residential's occupancy rates are already high and growing, its rental pricing power is increasing, and lending rates are rising -- which should further spur rental demand -- then perhaps the fact that as a REIT it's required to pay out at least 90% of its net income to shareholders as a dividend will!


Source: Nasdaq.com. 

Although Equity Residential's dividend saw a dip during the recession, it still pays out a yield at 2.8% that will easily top a 10-year U.S. Treasury bond. Another way of thinking about this is that Equity Residential has paid out more than $17 per share in dividends since 2003 on top of the fact that its share price has more than doubled. This is about as steady of a dividend as you can find in the REIT sector.

Foolish roundup
Even though I featured AvalonBay as a great dividend you can buy right now as well, I think the residential-REIT sector is large enough to fit to two rental behemoths. As the prospect of a Fed bond-buying wind-down becomes a reality, it would only be reasonable to expect apartment demand and rental pricing to improve, playing directly into Equity Residential's favor. With the recent addition of Archstone's portfolio of properties to its rental portfolio, Equity Residential's funds from operation would only be expected to increase from here on out, boding well for income-seeking investors.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery" outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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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 June 25, 2013, at 6:50 PM, Brandon2037 wrote:

    Hey Sean, I would like for you to share your comments about EQRs dividend. Since 2003 the dividend has not really grown much at all in my opinion. It paid out $0.4325 per share in 2003 and I believe it is currently paying out $0.40 per share. I know it may pay a little higher in the 4th quarter but I see that the annual dividend is roughly the same as it was in 2003 and since as you pointed out the shares have roughly doubled since 2003 that means the yield is roughly half what it was in 2003. So if the yield returns to the level it was in 2003 either the dividend growth rate really needs to pick up or the share price needs to fall drastically. I would be interested in your opinion of why the dividend has not grown that much for the last decade and if you think this will improve in the future. Thanks.

  • Report this Comment On June 29, 2013, at 4:46 PM, TMFUltraLong wrote:

    Brandon,

    I think the lack of dividend growth had to do with one primary factor. Between 2003 and 2007 the housing market was on fire and no one was looking to rent, leaving a lot of rental vacancies and little pricing power for EQR and AVB.

    However, as the housing bubble imploded you had people with good and OK credit losing their homes... this decimated so many people's credit history and pretty much required they head to apartment living since they'd not qualify for a home loan for years. Since the housing recovery is still ongoing and people are still losing their homes, more and more people are turning to apartment living which is slowly increasing rental communities' pricing power.

    if you give EQR a few more years, I think we could see $.48-$.50 per Q.

    Sean

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