When looking for stocks to fund your retirement nest egg, it's not enough to just pick stocks with strong dividend yields. Sure, a high dividend yield is nice, but a stable, growing dividend combined with the potential for capital appreciation is the ideal combination to build retirement wealth. Here's why our Motley Fool investors think American Campus Communities (NYSE: ACC), Visa (NYSE: V), and Simon Property Group (NYSE: SPG) are all excellent choices.
A different kind of apartment REIT
Matt Frankel (American Campus Communities): With a 4.2% dividend yield, student housing REIT American Campus Communities has an excellent combination of income and future growth potential that could help build your nest egg over the coming decades.
American Campus Communities is a play on the changing preferences in college student housing. The company's thesis is simple. Most student housing that exists today is either on-campus residence halls, many of which were designed more than 50 years ago, or off-campus rental houses and apartment communities not designed for students. So, by creating purpose-built developments designed with the needs and preferences of college students in mind, there's a lot of untapped potential for growth.
The company's properties rent for comparable rates to existing on-campus options but are modernized, have lots of amenities, and are generally more desirable to college students.
American Campus Communities has an impressive track record in this young industry, with more than 12 consecutive years of same-store revenue growth and more than $9 billion in acquisitions and developments since its 2004 IPO. In all, the company has generated a 346% total return for its shareholders since then (12.2% annualized) and continues to grow at an impressive rate with $673 million in developments and acquisitions planned for 2018, and more planned for 2019 and beyond.
A dividend that could grow 15% per year
Jordan Wathen (Visa): When it comes to dividend stocks, it's my view that a low yield that can grow fast is better than a high yield that offers little growth potential. To that end, Visa trades at an attractive valuation and offers a clear path toward double-digit dividend growth over the next 10 years, if not longer.
Visa has one of the best business models in the financial world, acting as a toll road on which electronic payments travel. For its role as the network, Visa takes a small fee from every transaction, often just mere pennies per swipe. In the aggregate, these small fees add up to real money. Visa generated $4.9 billion of revenue last quarter on more than $1.9 trillion of total payments volume.
The thesis for Visa is simple: Payments businesses will earn more as cash transactions shift to cards, higher-margin credit cards take share from debit cards, and margins expand with payments volume since many of Visa's expenses are fixed.
Though Visa shares may sport a paltry 0.6% yield, it's my view that the dividend will grow thanks to profit growth and an increasing payout ratio. Having spoiled investors with dividend increases of 17% or more in every single year since its IPO, I suspect Visa will continue growing its dividend at a blistering pace for a long time to come.
It's a mall world after all
Chuck Saletta (Simon Property Group): We might look back at 2017 as the year when brick-and-mortar stores and online retail finally realized that they needed each other for both to thrive. Between Amazon.com's (NASDAQ: AMZN) purchase of Whole Foods Market and other retailers that are delivering positive same store sales gains despite the intensifying competition, it's clear that consumers want both.
That's one reason mall owner Simon Property Group looks capable of succeeding despite the years of awful news that traditional retailers have faced. With innovations such as "mixed use" development malls that include retail, hotel, food, and entertainment in one location, Simon has ways to keep people coming to its properties, despite the issues in traditional retail. Those innovations on top of retailers' move toward omnichannel sales strategies keep Simon's properties relevant.
The strategy looks very much like it's paying off. Simon Property Group is expected to be able to increase its earnings by around 9% annualized over the next five years. Earnings growth is critical for any company that's looking to maintain and increase the dividend it offers to its investors. Simon's dividend currently sits at $1.85 per share per quarter, $7.40 per year, offering investors a 4.6% yield.
Simon has done an admirable job of restoring its dividend growth trajectory since the end of the financial crisis. Between the future of retail as being omnichannel and Simon's own push toward mixed-use real estate, it looks well positioned to be likely to keep up that trend in the near-term future. If you're looking for a dividend stock to help grow your nest egg, you could do far worse than Simon Property Group.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chuck Saletta has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Visa. The Motley Fool has a disclosure policy.