Most investors focus on a stock's yield when it comes to dividends. That can cause them to miss out on the greater long-term benefits of dividend growth. Companies that merely maintained their dividend delivered an average total return of 7.08% from 1973 to 2021, according to data from Ned Davis Research and Hartford Funds. That underperformed the 8.2% return of stocks in the S&P 500. On the other hand, dividend growers produced an average total return of 10.68%. Furthermore, they delivered that growing income stream and higher total return with less volatility than the S&P 500 and dividend maintainers.
Three stocks that don't get enough credit for their dividend growth track records are lesser-known real estate investment trusts (REITs), Community Healthcare Trust (CHCT -0.80%), Extra Space Storage (EXR -1.39%), and Terreno Realty (TRNO -1.78%). Here's a look at the secret to their success.
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A healthy dividend
Community Healthcare Trust has flown under the radar of most investors over the years, probably because of its small size compared with its healthcare REIT peers. Most investors have therefore missed the fact that it has grown its dividend every quarter since its initial public offering in 2015. That's an impressive track record, especially since many of its larger rivals have had to reduce their dividends in recent years because of the pandemic's impact on some of their tenants, especially those in the senior housing industry.
Community Healthcare Trust has avoided that issue by focusing on owning properties leased to providers of outpatient healthcare services. It also concentrates on acquiring properties in non-urban communities where it faces less competition from other real estate investors. These properties have proved to be relatively immune to the impacts of the pandemic. Meanwhile, its location focus has enabled it to acquire properties at higher income yields to support its dividend.
That steady dividend growth has enabled Community Healthcare Trust to deliver impressive total returns. The REIT has produced a more than 175% total return since its IPO (15.5% annualized). That has significantly outpaced the S&P 500's 90% total return (12.1% annualized) during that timeframe.
Extra special dividend growth
Extra Space Storage has long been in the shadows of self-storage REIT behemoth Public Storage. That has caused investors to miss that Extra Space has been a dividend growth juggernaut. The self-storage REIT has boosted its dividend by 650% over the past 10 years.
A key driver of Extra Space's dividend growth has been its third-party property management program, which it launched in 2009. The REIT is the largest manager of self-storage locations owned by others, enabling it to generate additional income from management fees, tenant insurance, and loan interest. This strategy has also increased its operational efficiency while providing a built-in pipeline of low-risk acquisition opportunities.
Extra Space's third-party management strategy has helped supercharge its growth, enabling the REIT to deliver peer-leading funds from operations per share growth over the last 10 years. As a result, Extra Space has produced the best performance in the entire REIT sector by generating a nearly 800% total return (24.4% annualized), well ahead of the S&P 500's more than 280% (14.4% annualized) total return.
Location focus has paid big dividends
Terreno Realty is relatively unknown in the industrial REIT sector, overshadowed by industry giant Prologis. That means many investors haven't noticed its impressive dividend growth track record. Terreno has grown its dividend at an 11.8% compound annual rate since initiating the payout in 2011.
Location has been the key to Terreno's success. The REIT focuses on six coastal markets benefiting from growing industrial real estate demand amid tightening supplies. Those tight supply and demand dynamics have helped the REIT grow its same-store net operating income at an 11% compound annual rate since its initial public offering in 2010. Meanwhile, the REIT has complemented the growth of its legacy assets by acquiring new ones, with a heavy emphasis on value add investments to increase supply in supply constrained areas.
That location-focused strategy has paid off for investors. Terreno has delivered a more than 450% total return over the past decade (18.7% annualized), easily outpacing the S&P 500's performance during that period.
Not getting the credit they deserve
Community Healthcare Trust, Extra Space Realty, and Terreno Realty have flown under the radar of most income investors, overshadowed in part by their much larger rivals. That has caused many investors to miss out on their tremendous dividend growth and performance track records. While their past success is no guarantee of future performance, this trio is worth a closer look for investors seeking steadily growing passive income streams.