Dividend increases are one of those things that income investors love to see, year in and year out. Apartment landlord UDR (UDR 0.52%) is positioning itself to become a reliable dividend grower for years to come, building on its already impressive streak of 13 consecutive annual hikes. Here's how it plans to keep rewarding investors for sticking around.

The new-ish model

At one point in UDR's life, it was called United Dominion Realty and was focused on buying second-tier apartments that it would fix up. But about 13 years ago or so, it changed its stripes, selling off its lower-quality properties to focus on owning better properties in better markets. There was a CEO change in the mix during this shift in business focus. It worked out fairly well for investors: The stock has easily outperformed the average real estate investment trust (REIT) (using Vanguard Real Estate Index ETF as a proxy) since the start of 2010, shortly after the dividend cut that accompanied the change in its business model.

Four people in a room with packing boxes.

Image source: Getty Images.

That said, the stock fell dramatically in 2022, losing over a third of its value. That's notably worse than the average REIT, which is down "just" 25% or so. UDR's yield is around 3.8%, roughly in line with the average REIT's dividend yield. That level is toward the high end of the UDR's historical range over the past decade.

Is Wall Street warning that UDR's dividend is at risk or that growth is just likely to be slower in the future than it has been in the past? To put some numbers on that, the REIT's dividend grew at a roughly 5.5% annualized clip over the past decade, but it has been below that average over the one-, three-, and five-year time frames.

Still growing

If what you are looking for is a fast-growing dividend, UDR probably isn't for you. But the REIT is still in a position to provide slow and steady dividend growth for those seeking exposure to the apartment space. There are a few reasons that it's likely to succeed. 

For starters, UDR has one of the most diversified portfolios you'll find in the apartment niche. Specifically, it has built up exposure to the Northeast and Mid-Atlantic (39% of net operating income), Sun Belt (24%), and West Coast (37%). All have different market dynamics, but overall the mix helps to smooth out the company's performance. 

For example, during the early days of the coronavirus pandemic when people were moving out of big coastal cities, the Sun Belt was a key beneficiary. As pandemic concerns waned, people began to move back to big coastal cities, pushing rents up dramatically. UDR didn't miss out on either of the positive trends here because of its diversification. If you think diversification is good for your portfolio, you might want to consider it a key stock selection criterion as well.

Operating in a lot of markets has other benefits. Specifically, UDR uses acquisitions, internal ground-up development, and redevelopment to expand its business. It's hard to predict acquisitions, but it can clearly use its broad market presence to source acquisition opportunities and make them operate as efficiently as possible once they are added to the local pool. Adding new properties quickly adds to cash flow and dividend-paying ability.

Meanwhile, UDR currently has over $530 million worth of large capital investment projects (new buildings) in the works. As they open and are filled up, which usually takes a little while, they will start to add to the company's top and bottom lines...and its dividend-paying ability. On the redevelopment front, UDR has around $100 million worth of projects that span from adding new units to a current location all the way to upgrading a vacant apartment's kitchen. New units add to the cash-generating opportunity at a property while upgrades allow UDR to charge higher rents at existing assets. You probably already guessed, but both support the REIT's dividend-paying ability. 

Nothing has changed

While Wall Street seems worried about UDR right now, nothing material has changed at the company since it revamped its business model over a decade ago. And there's no reason to think the "new-ish" approach is suddenly going to stop working. Moreover, with an adjusted funds from operations (FFO) payout ratio of around 70% in the third quarter, there's a lot of room for adversity before the dividend would be at risk. If you are looking for an apartment landlord with an attractive yield and dividend growth prospects, you should consider digging even deeper into UDR.