Dividend stocks are the gift that keeps on giving. They send their investors a share of the profits each quarter. Even better, those payments tend to increase each year.
Many dividend stocks are on sale this year, with their prices driven down by the sell-off in the stock market. As a result, they're offering higher dividend yields. Three Fool.com contributors think Digital Realty Trust (DLR 0.12%), Highwoods Properties (HIW 0.92%), and Equity Residential (EQR 0.90%) are great additions to your holiday stock shopping list.
A great dividend growth stock at a lower price
Matt DiLallo (Digital Realty): Leading data center real estate investment trust (REIT) Digital Realty is on sale these days. The company's stock price has tumbled almost 40% this year. This sell-off has pushed its dividend yield up to 4.5%, the highest level in nearly a decade.
That's an attractive income stream from a company with an excellent track record of growing its payout. Digital Realty has increased its dividend for 17 straight years, dating back to its initial public offering in 2004. That puts it in a select group of REITs that have increased their payouts every year since their formation.
Digital Realty should be able to continue growing its dividend in the future. Demand for data center capacity remains robust. Digital Realty delivered record quarterly bookings in the third quarter, its third record in the past four quarters. That's helping keep occupancy rates high across its existing locations while enabling the company to continue expanding. The company has a growing pipeline of development projects underway and has already pre-leased 60% of that capacity.
The REIT also has a long history of making value-enhancing acquisitions to drive additional growth. The company most recently acquired a majority stake in Teraco, valuing that company at $3.5 billion. The deal adds South Africa to Digital Realty's global platform as it expands on that fast-growing continent.
Digital Realty's growth drivers should enable the REIT to continue increasing its high-yielding dividend in the future. With its stock price cheaper, it's an excellent dividend stock to consider buying this holiday season.
Highwoods Properties provides a 7% dividend from Sunbelt office holdings
Marc Rapport (Highwoods Properties): Demand for office space fell off a cliff during the pandemic and looks likely to stay down there going forward. But that doesn't mean there aren't some office REITs worth reeling in this holiday season.
A good one to consider is Highwoods Properties, buyer/owner/operator of properties in what it considers the "best business districts" in Dallas, Tampa, Richmond, Nashville, Atlanta, Charlotte, and Raleigh.
What those markets have in common, of course, is that they're growing Sunbelt metros. Highwoods focuses on high-end locales within these markets and has been able to keep space leased even while raising the rent. That strategy and the stock's current metrics alike point to good prospects here.
Analysts give the stock a consensus target price of $32, which would be about a 13% gain from the $28 or so it was trading for at this writing. That price is about 35% down year to date but up about 11% in the past month.
Even with that recent jump, I think shares might be undervalued for both potential growth in share price and dividend income. For instance, Highwoods has been steadily growing its funds from operations (FFO) per share for a decade but is still trading at a price-to-FFO ratio of a low 5.7.
For that, you get a current yield of about 7% after five straight years of dividend increases. Add to that a very low payout ratio of 37% based on cash flow, and there's room to believe more substantial payouts could be in the offing.
I bought Highwoods Properties to add some office space to the collection of REITs I put together for retirement growth and especially income. Highwoods seems well positioned to take advantage of what life there is left in that sector.
Don't fear falling home prices
Brent Nyitray (Equity Residential): Equity Residential is a REIT that focuses on upscale apartments in fast-growing urban areas with a strong knowledge-based job market. The company has urban apartment complexes in Southern California, Seattle, New York City, Boston, and the San Francisco Bay Area. The company focuses on urban markets that have high single-family home prices, a strong job market, and high barriers to entry to build new housing.
Over the past few months, home price appreciation has come to a halt. This is due to falling affordability, especially for the first-time homebuyer who is being squeezed by higher mortgage rates and prices. Investors have also been pulling back from the market. The torrid home price appreciation from mid-2020 to mid-2022 is over, at least for the moment.
If home prices are beginning to fall, does that mean rents will decline for apartment REITs like Equity Residential? Over the next couple of years, probably not. According to some studies, rental inflation lags home price appreciation by 21 months, or about just under two years. This is because rents reset to market only once per year at the fastest, and often truly reset only once the tenant departs (most landlords are reluctant to increase a tenant's rent by 20% if that is new market rate).
Equity Residential has properties in metropolitan statistical areas that have experienced the fastest growth since the COVID-19 pandemic began. That appreciation has barely begun to be reflected into rents. Equity Residential stock has declined by 30% this year as interest rates have risen. At current levels it has a dividend yield of 4% and is an attractive stock for an income investor.
