In my view, the best dividend stocks have consistently strong cash flows, a dividend that grows over time, and a unique niche or business model that's both evergreen and in demand. If that sounds like a tall order, it is. But if you scour the stock market horizon carefully, sometimes you can find a stock that fills the bill.
One company I believe has many of these qualities is Alexandria Real Estate Equities (ARE 1.59%). Based in Pasadena, California, this real estate investment trust (REIT) builds and leases commercial real estate of a very special kind: laboratory space for life science research. With its rentable laboratory properties located in biomedical research hubs like Boston, it aims to capture a portion of the tremendous, ongoing growth in biotech and pharma. It's also one of my favorite dividend stocks. Let's explore why.
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Renting out lab space is a great niche
The first thing dividend investors should look for when evaluating a stock is the overall quality of the company's product within its target market.
Alexandria gets top marks, in my view. Even before tenants move in, Alexandria's staff work hand-in-hand with them to make sure that their spaces are built out and operating exactly to their specifications. Since its founding in 1994, that approach to clients has made it a leader in the laboratory real estate industry.
For pharma companies, it can just be a lot more efficient to rent properties like Alexandria's, which are all ready to go. In fact, in my past life as a biomedical researcher in two of Alexandria's facilities, I was able to see firsthand how skilled the company is at providing high-quality basic research infrastructure like gas lines, ventilation systems, and clean rooms.
Alexandria currently leases more than 36 million square feet of lab space to its customers with another 3.4 million square feet under construction. Major customers like Moderna, Pfizer, and GlaxoSmithKline rely on its services again and again, a good indication that management knows what it's doing.
In fact, 85% of the company's 20 largest tenants are major businesses with reliable cash flows. Nor does any single tenant account for a large share of annual revenue. That means unpaid leases are not likely to be a major problem. Plus, finding new tenants should not be hard. 94% of its properties are occupied, and the weighted average lease term is 7.5 years.
For a REIT, Alexandria has a relatively modest dividend yield of about 2.3%. But it's growing. Over the past 12 months the company has raised its dividend 6% to $1.12 per share. Moreover, that dividend should be remarkably secure. Over the past five years, the company's free cash flow (FCF) has increased by 100%, and there's likely more growth to come. With these strong cash flows, increasing the dividend over time seems likely.
One more notable fact: 95% of Alexandria's leases include clauses for annual rent escalations of around 3%, which allows it to steadily make more revenue.
ARE Total Return Level data by YCharts
Expect even more flourishing in the future
Demand for Alexandria's lab spaces should continue to drive higher lease prices and support building out more capacity. In the second quarter of 2021, Alexandria reported its highest rate of leasing activity ever, and rental rates for both new tenants and lease renewals rose by 25.4%.
Investors have taken note. Alexandria's stock is up 21% over the past year. Between annual rent escalations and strong demand from tenants, the stock has more than one driver of future returns, and its business model is clearly working quite well. As long as that's the case, dividend investors should find this a worthy stock to consider.
