I can't seem to get enough of Blackstone (BX -0.43%) stock these days. I added the leading alternative investment manager to my portfolio last summer and have increased my position four times since then. And I plan to add even more shares of the big-time dividend stock (Blackstone currently yields 6.1% versus 1.7% for the S&P 500) if shares fall further.
While that sizable passive income stream is a big draw, it's far from the only reason I continue adding to my Blackstone position, which is one of my highest-conviction investments. Here's why it's one of my top investment ideas for 2023 and beyond.
A victim of its own success
I've been steadily buying Blackstone shares as they've fallen in recent months. The primary factor weighing on the stock is a surge in redemptions at its non-traded real estate investment trust (REIT), Blackstone Real Estate Income Trust, or BREIT.
The company created that product in 2016 to provide high-net-worth investors access to the private real estate market, which offers higher income yields and lower volatility than publicly traded REITs. The product has been a smashing success. BREIT has grown into one of the largest REITs in the world, with a net asset value (NAV) of $69 billion. It has also generated strong total returns for investors of 12.5% annualized since its inception, significantly outperforming the public REIT index.
BREIT continued its strong performance last year, delivering 9% returns through the third quarter. That led a growing number of investors to seek to redeem their shares to cover losses elsewhere and capitalize on other investment opportunities.
As a result, BREIT hit its redemption cap (2% of NAV in a calendar month and 5% per quarter), which caused the market to worry about its liquidity. The company has since eased those concerns by cashing in on its casino property investments in Las Vegas and securing an anchor institutional investor.
The long-term thesis remains intact
BREIT has been a big profit growth driver for Blackstone. This means the surge in redemptions could hurt its bottom line in the near term.
However, the long-term tailwinds driving its business haven't changed. Investors are increasingly allocating more of their portfolios to alternatives like private equity, real estate, infrastructure, and hedge fund solutions.
Preqin, a leading provider of data and insights for the alternative investment sector, expects alternative assets under management (AUM) to nearly double from $9.3 trillion in 2021 to $18.3 trillion by 2027. Institutional investors like pension and sovereign wealth funds will remain the biggest players in the sector.
Blackstone's brand power and investing prowess have enabled it to continue raising increasingly larger funds. For example, Blackstone Strategic Partners recently closed record private equity secondary funds by raising $25 billion.
In addition, retail investors are rapidly increasing their allocation to the space. Research from Morgan Stanley estimates that private market AUM will grow by 12% annually over the next five years. The investment bank foresees the biggest growth coming from individual investors. It estimates that high-net-worth investors will more than double their allocation to alternatives to 8% to 10% of their portfolios.
That plays right into Blackstone's strategy. It sees the retail market as a massive, virtually untapped opportunity. That led it to create products like BREIT and private credit fund BCRED to provide high-net-worth investors with access to private market investment opportunities.
While retail investors seeking liquidity have pulled money out of those funds in recent months, these products should continue to be growth drivers for Blackstone over the long term. The company's private wealth AUM has grown 43% over the past 12 months to $236 billion.
With nearly $1 trillion of AUM, Blackstone is generating significant and growing fee-related income. On top of that, it's earning substantial performance revenues as its funds deliver on their return objectives. That's giving the company the income to continue paying a sizable and growing dividend.
Tremendous total return potential
Blackstone's big dividend -- which varies from quarter to quarter with its earnings -- provides a nice base return. On top of that, the company has tremendous growth potential as more investors allocate a greater percentage of their portfolio to alternatives.
While it's currently facing a headwind in the retail sector, that should shift back to a tailwind as market conditions improve. As it does, the stock should recover from its recent dive and achieve new heights in the future. That's why I continue adding to my position and will keep doing so if shares fall further.
