With thousands of publicly traded companies that pay dividends, it can be overwhelming for dividend investors to filter through and find stocks that fit their investment objectives. One way to separate the wheat from the chaff with dividend stocks is to consider stocks that have upped their dividends for at least 25 years straight.
This narrows the list of stocks down to just 141-- of which about half are among the Dividend Aristocrats, those companies in the S&P 500 that have made the grade. One stock with a track record of more than 25 years of payout increases is the real estate investment trust (REIT) National Retail Properties (NNN -1.25%). Let's go over how the stock's dividend has grown for so long and why it looks poised to keep growing in the years to come.
Image source: Getty Images.
The formula behind National Retail Properties' success
National Retail Properties is a triple net lease REIT. This means that the company's tenants are responsible for cutting a monthly base rent check and paying insurance, taxes, and maintenance expenses as well.
National Retail Properties purchases freestanding retail properties from its clients. But why would clients opt to sell their properties and lease them from National Retail Properties? The proceeds used from selling their real estate could be used for a variety of purposes, like repaying debt or redeploying capital to expand their company's operations.
National Retail Properties' business model has allowed it to expand its portfolio to 3,223 properties in 48 U.S. states. The company's large scale also translates into diversification as a result. National Retail Properties' top 20 tenants only made up 49.7% of its annualized base rent at the end of last year.
Since National Retail Properties has close working relationships with numerous tenants, the company is able to select the highest quality properties from mostly noninvestment-grade tenants. This investment approach explained how the company was able to invest $555.4 million in properties at a capitalization rate of 6.5% last year.
Thanks to its investment-grade balance sheet and 3.7% weighted average interest rate, National Retail Properties is able to generate a nice spread between its cap rate and weighted average interest rate. This explains how the company has been able to produce 3.1% annual core funds from operations (FFO) per-share growth since 2015. And factoring out the disruptions from the COVID-19 pandemic that led to a 10.4% drop in core FFO per share in 2020, this growth rate would be even higher.
The final factor that spells out how National Retail Properties has steadily grown its dividend is that the company's initial lease terms with tenants are 15 to 20 years. As long as tenants are able to pay their rent obligations, this provides a great deal of stability for National Retail Properties' revenue and core FFO per share.
The current state of the dividend
Another reason National Retail Properties has been able to raise its payout for 32 consecutive years is its manageable dividend payout ratio.
Last year, National Retail Properties generated $2.86 in core FFO per share. Against the $2.10 in dividends per share that were paid, this works out to 73.4% payout ratio. There are two benefits to having a sustainable dividend obligation.
First, this helps National Retail Properties to retain part of its core FFO to purchase more properties and drive future growth. Future growth is what ensures National Retail Properties' dividend will grow in the years ahead.
Second, the sensible payout ratio also serves as a buffer in the event that the company's core FFO per share temporarily declines like it did in 2020. Simply put, National Retail Properties has the breathing room to both pay its dividend and still make property acquisitions in a brief downturn.
A REIT upon which income investors can rely
National Retail Properties can provide yield-hungry investors with a market-crushing 5% dividend yield. Unlike many dividend stocks with yields this high that could be too good to be true, National Retail Properties' dividend looks to be the real deal. And with the stock's dividend yield somewhat higher than its 13-year median of 4.5%, National Retail Properties looks like a good buy at this time.
