AvalonBay Communities (AVB -0.01%) and Public Storage (PSA -1.33%) have been rather stingy in recent years. The real estate investment trusts (REITs) last increased their dividends quite a while ago. However, both recently boosted their payouts.
That dividend growth is noteworthy given the historical outperformance of companies that increase their payouts. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered an average annual return of 10.7% over the last 50 years. That has outpaced companies with no change in their dividend policy (7.1% average annual total return) and the equal-weighted return of the S&P 500 (8.2%).
Here's a look at their dividends and whether these companies can continue to push their payouts higher in the future.
Getting back to steady growth
AvalonBay Communities recently declared its first-quarter dividend. It's paying $1.65 per share, which is 3.8% above its prior dividend payment. That's the apartment REIT's first dividend increase since the pandemic started:
AVB Dividend data by YCharts
As that chart shows, AvalonBay had previously been a steady dividend growth stock. However, the company stopped increasing its payout in early 2020 due to the impact the pandemic had on apartment demand in high-cost coastal markets. That put pressure on occupancy levels, rental rates, and the REIT's funds from operations (FFO).
Apartment demand in major cities has started recovering. Last year, AvalonBay reported a 13.2% increase in its same-store net operating income (NOI), driven by double-digit rental revenue growth and strong occupancy levels. That helped power a 18.5% jump in core FFO to $9.79 per share.
The REIT expects to continue growing in 2023. It anticipates core FFO to increase by about 5% to $10.31 per share, driven by continued same-store NOI growth and the impact of development projects. That will give the company plenty of money to cover its higher annual dividend outlay of $6.60 per share.
Given that conservative payout ratio, AvalonBay has room to increase the dividend. In addition, it currently has 17 development communities under construction that should provide incremental NOI as they stabilize. Add in the prospect for continued same-store NOI growth as rents rise, and AvalonBay should be able to continue raising its dividend in the future.
A big boost
Public Storage is making up for lost time. The leading self-storage REIT recently declared its latest dividend at $3.00 per share, a whopping 50% above its previous payment. It marked the company's first dividend increase since 2016.
Public Storage had chosen to keep its payout flat to retain more cash to maintain a top-tier balance sheet while executing its growth strategy. The REIT has spent $8 billion on acquisitions, developments, projects, and redevelopments since the start of 2019. Those investments have expanded its portfolio by 26%.
Those investments and above-average same-store NOI growth have helped drive a significant increase in FFO. Public Storage's core FFO per share jumped 25.3% through the first nine months of last year to $11.77 per share. That's plenty of money to cover its reset dividend, which would have cost $9.00 per share.
Even with those investments, the REIT has maintained a strong balance sheet, giving it room to continue expanding. It recently offered to acquire fellow self-storage REIT Life Storage in an $11 billion deal to supersize its growth prospects. It would also enhance its ability to retain free cash flow after paying the dividend to fund future growth-related investments.
With a strong balance sheet and conservative payout ratio even at the ramped-up rate, Public Storage has the flexibility to continue raising its dividend. Meanwhile, its FFO should continue increasing as it uses its balance sheet capacity to make acquisitions and invest in development and redevelopment projects.
The power to produce higher returns
Historically, companies that grow their dividends produce higher returns than those that keep their payouts static. As a result, investors won't want to miss the recent raises issued by AvalonBay Communities and Public Storage. While it's no guarantee they'll outperform from here, both companies have the capacity and growth prospects to continue increasing their payouts. That makes them much more attractive to investors seeking to earn above-average total returns.
