Why Prologis and STAG Industrial Are Overlooked Dividend Gems

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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  • Report this Comment On May 09, 2014, at 5:31 PM, DodgerDan wrote:

    1. There is a factual error in the article. Prologis has in fact increased its dividend from 28 cents to 33 cents this past February.

    2. The Company was recently priced in the upper 30's with its old dividend yield of 2.8% With the dividend increase, one could make the argument that the stock price should be closer to 45 than its current 41 valuation.

    3. The company fundamentals are strong and getting stronger: the portfolio is at virtual full occupancy, the industry as a whole has not built much new supply in the last six years, e-commerce and the return of manufacturing to the US has added to demand for industrial in the major markets which has all been validated by rent growth now starting to show up in the PLD results. In the SF Bay Area for example new rents are averaging more than 20 % more than old rents.

    4. There is nothing inherently wrong about secondary markets. In fact, investors can get good returns there. However, be advised that they are called secondary for a good reason: generally they are the last to feel the recovery and the first to feel the downturn. Because the recovery is just now starting to hit many secondary markets, this may be an attractive time to buy.

    5. "B" Product is ranked as B and not as higher rated A product for a reason: it is older, less functional, and closer to obsolescence. This is not to say it is obsolete but one of the facts that seen in multiple markets during the Great Reset of 2008 when demand was so weak was that the companies who were still renting space ONLY wanted to do so in the best locations in the best (that is, "A" products). This is another example of risk & reward which I am pointing out because there is a reason why B buildings can produce good yields in much the same way as junk bonds can: it's because the return relative to the price can be higher.

    6. If I was going to invest in one of the two companies, it would be in Prologis because their strategy, execution, and business fundamentals are solid.

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