Stock prices have tumbled this year as surging interest rates to combat high inflation have investors worried we're heading into a deep global recession. The S&P 500 index has tumbled more than 25% from its peak, putting it well into bear market territory. Meanwhile, many other stocks have fallen even further.
Three stocks that have taken a particularly frightening fall this year are STAG Industrial (STAG 1.60%), Digital Realty (DLR 0.12%), and Simon Property Group (SPG 0.05%). Here's why our contributors believe these top dividend stocks can eventually spring back, making the recent sell-off look like a potentially compelling buying opportunity.
A logistics REIT with a solid past and promising future
Marc Rapport (STAG Industrial): It's a spooky time for stocks right now, and STAG Industrial is no exception. Shares of this high-performing industrial REIT are down about 45% so far this year amid concerns about e-commerce volume and economic malaise in general.
But that beatdown can obscure some significant upside. STAG pays dividends monthly and is currently yielding about 5.4%. Analysts rate it a buy with a consensus target price of $43.60, which would be about a 64% jump from its current $27 or so a share. And there's history to consider, too. Since its April 2011 IPO, STAG stock has provided a total return of about 320%, compared with about 185% for the Dow Jones Industrial Average and 108% for the Vanguard Real Estate ETF, a useful REIT benchmark.
STAG also just reported that it expects to grow same-store cash net operating income (NOI) from 4.25% to 4.75% through 2022, the most in its 12-year history and that it expects to spend up to $1.1 billion on new acquisitions this year.
Amazon is this logistics specialist's largest client, at about 3% of its rent. But the top 20 tenants together only comprise 17% of that rent roll, pointing to diversity and resiliency that should help STAG Industrial keep treating its dividend-loving shareholders with growing payouts for years to come.
The trend hasn't changed
Matt DiLallo (Digital Realty): Shares of Digital Realty have cratered nearly 50% this year. That has pushed the data center REIT's dividend yield up to 5.4%, its highest level in almost a decade. Because of that, investors can get paid very well while they wait for the stock to bounce back.
A rebound seems likely since the underlying trend that has driven its growth over the years -- surging data usage -- hasn't diminished. That's evident in what Digital Realty continues to see in the market.
On the company's second-quarter conference call, Senior Vice President of Investor Relations Jordan Sadler said, "The overarching trend of digital transformation remains a secular driver for our business, which was highlighted by yet another quarter of greater than $110 million of bookings and over 100 new logos added." Sadler further noted that leasing spreads improved, helping offset rising costs.
Digital Realty also continues making progress on its global expansion strategy. It recently acquired a stake in Teraco, a leading data center provider in South Africa. Meanwhile, the company had 41 expansion projects underway at the end of the second quarter -- a 10% increase from the first quarter -- and had already pre-sold half that capacity, showcasing strong demand for its data center solutions.
That combination of increasing lease rates and investments to expand its portfolio should enable Digital Realty to grow its funds from operations (FFO) per share and dividend. That would continue the REIT's steady growth, with it delivering its 17th consecutive annual dividend increase in 2022. This growth should eventually lift shares, which is why Digital Realty looks like an excellent bounce-back candidate.
The clouds may be parting for a beaten-up sector
Brent Nyitray: (Simon Property Group): As a real estate investment trust (REIT), Simon Property Group focuses on high-end retail shopping malls and lifestyle centers. REITs as an asset class have been beaten up this year as the Federal Reserve began its campaign of hiking interest rates in order to quell inflation. REITs tend to trade on their dividend yields, and when rates are rising, REITs tend to see their prices decline.
Despite negative gross domestic output growth so far this year, consumer spending has held up reasonably well. On the company's second-quarter earnings conference call, CEO David Simon noted that its tenant retailers reported record sales per square foot. The exceptionally strong labor market has been a huge support for consumer spending, and falling gasoline prices will free up room in families' budgets for increased discretionary spending.
Simon has guided for funds from operations (FFO) per share to come in between $11.60 and $11.72 a share this year. REITs generally report their earnings in FFO per share because it tends to better reflect the underlying cash flows of the company than net income reported under generally accepted accounting principles (GAAP). Real estate-centric companies tend to have a lot of depreciation and amortization, which is a non-cash charge.
Simon pays an annual dividend of $7 per share, which gives the company a dividend yield of 7.6% per year. This dividend is easily covered by Simon's forecast for FFO per share this year, which means the dividend is pretty safe. Unless we see a collapse in consumer spending, this year's holiday shopping season should be brisk. Between strong end-of-year sales and a potential end to the Fed's tightening cycle, Simon Property is a good candidate for a rebound.
