Why Prologis and STAG Industrial Are Overlooked Dividend Gems

Buying industry leaders is one way to find safe dividends, but it's not the only way...

May 7, 2014 at 8:00AM

Income investors usually want to live off their dividend payments, making dividend safety a primary concern. That often means favoring industry leaders. But that's not the only way to go and it can mean settling for notably lower yields. For example, real estate investment trust (REIT) Prologis (NYSE:PLD) is the giant in the industrial space and is focused on the best markets. Smaller STAG Industrial (NYSE:STAG), meanwhile, buys in second tier markets, is growing fast, and yields around 50% more.

Playing it safe...
In the industrial space, buying Prologis is the "playing it safe" choice. The company owns over 2,900 building across 21 countries. That includes about 70 properties in high growth Asia. That's important to note because Prologis is refocusing around serving the global supply chain.

In mid-2011 this segment accounted for about 80% of Prologis' business. It's up to about 85% now, with an ultimate goal of reaching 90%. The reason is pretty simple, more products than ever are being traded around the world. Prologis wants to be the go-to supplier, offering a relationship that can span continents.


(Source: Buonasera, via Wikimedia Commons)

And, according to Prologis, the industrial sector itself offers some key advantages: "Highest income return," "Above-average total returns," "Competitive risk-adjusted returns," and "Below-average volatility." It's no wonder that investors like the stock, bidding the shares up to the point where they yield a paltry 3.2% or so.

Worse, Prologis hasn't increased its annual dividend since cutting the payout during the 2007 to 2009 recession -- four years and counting. So, while there's no doubt that Prologis is a great company that owns premier properties, investors are sacrificing on the income side when buying this giant.

The second stringer...
STAG Industrial takes a very different approach that might, at first glance, frighten off conservative investors. However, it shouldn't, and this landlord's 5.1% yield should be more than enough to keep even conservative investors' attention.

Like Prologis, STAG is an industrial focused REIT. However, STAG buys Class-B properties in second tier markets. But that isn't as risky as it sounds. For starters, the benefits that Prologis noted about industrial properties flows down into the second tier markets. But STAG offers up some additional points about its industrial "B league" focus.

STAG notes that Class-B properties offer "Higher current returns relative to Class A properties," and "...more predictable cash flow..." Meanwhile, secondary markets tend to have "More stable occupancy and rental rates than primary markets." And "Competition is typically poorly capitalized local buyers," which means "Limited competition from larger investors."

And STAG's portfolio (around 200 properties) is tiny compared to Prologis, which means its growth potential is higher. For example, since its mid 2011 IPO, STAG has purchased over 120 properties. That would barely register at Prologis, but represents a massive portfolio expansion at STAG. Moreover, it believes there's plenty of room to keep growing.

STAG -- which only invests in the United States -- is tiny and isn't nearly as diversified as Prologis. So there is, on some level, more risk involved in owning its shares. However that added risk shouldn't be overstated. For example, while Prologis has allowed its dividend to stagnate, STAG has increased its dividend, which is paid monthly, every year since its IPO. A little size and diversification risk is probably worth the benefit of rising dividends and a yield boost of about two percentage points.

STAG Chart

Risk versus reward
You have to carefully weigh the risks and rewards of your stock choices when it comes to investing for dividend income. However, buying the biggest, "safest" name isn't always the best answer. Prologis is a great company with well-positioned assets, but when it comes to dividends it doesn't stack up to STAG. Yes, STAG is smaller, invests in lower quality properties in second tier markets, and less diversified, but taking on these risks (which aren't nearly as big as they might appear) provides more income and dividend growth. That's probably a worthwhile trade off.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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