Dividend stocks have historically outperformed broad market indexes like the Dow Jones Industrial Average. Meanwhile, the best returns tend to come from stocks that consistently increase their dividends.
That has certainly been the case for dividend machines like Agree Realty (ADC 0.83%), Prologis (PLD 2.60%), and Extra Space Storage (EXR 0.79%). Here's why these dividend stocks can continue their winning ways.
Agree Realty stands out as a provider of reliable total returns
Marc Rapport (Agree Realty): Agree Realty has turned itself into a Wall Street darling by cranking out years of outperformance from what might be considered a somewhat pedestrian business: leasing space to retail businesses.
Since going public in 1994, this real estate investment trust (REIT) has produced a compound average annual total return of 12.5% and has grown its dividend an average of 6.1% a year over the past 10 years.
And that makes Agree a bona fide Dow beater. Check out how this retail REIT's total return compares with that of the Dow Jones Industrial Average over the past decade:
ADC Total Return Level data by YCharts
And that Wall Street darling bit? Agree earns that description by impressing enough investors to keep its share price up about 17% year over year at a time when many of its competitors are staring at zero gains.
Agree's tenants are primarily investment-grade, name-brand retailers with a portfolio of more than 1,800 properties and growing. The company spent $1.59 billion on new acquisitions in 2022 and took about $1.5 billion of liquidity into 2023 to keep adding net-lease properties.
All that and a penchant for punching up the payouts means chances look good for Agree -- which currently yields about 3.9% and pays monthly -- to continue beating the Dow and pretty much any other relevant benchmark one may choose to use.
Prologis is benefiting from a change in corporate sentiment about inventory management
Brent Nyitray (Prologis): Prologis is a leader in logistics real estate. Over the past three years, the stock has handily outperformed the Dow Jones Industrial Average by almost 25%. Prologis operates these massive warehouse facilities with dozens of truck bays that you often see while driving down a major highway near a major city.
One of the big stories coming out of the COVID-19 pandemic has been corporate rethinking of inventory management. Prior to the pandemic, corporate America operated from the philosophy that inventory was a cost to be managed and extended supply chains were more efficient. This is in fact true, however there is a cost to that philosophy and it got exposed during the pandemic. Many companies were caught short and were forced to decline business because of insufficient inventory on hand.
The COVID-19 pandemic prodded companies to build inventory and this has translated into low vacancy rates and big increases in rents when leases reset or expire. At the end of 2022, occupancy stood at 98.2%, which was well above the pre-pandemic level of 96.5%. This high level of occupancy is translating into big rent increases when leases expire. Prologis has one of the best portfolios of logistics space based on proximity to large U.S. cities and major highways.
Last year, there was some concern about FedEx and Amazon reducing their warehouse space. So far the company hasn't seen any impact: Amazon is exiting some non-Prologis spaces and FedEx is looking at air freight, which won't affect Prologis. Given the fundamentals, Prologis should see strong growth for the foreseeable future.
Extra special returns
Matt DiLallo (Extra Space Storage): The self-storage sector benefits from durable and growing storage space demand. That keeps units filled, enabling the industry to raise rents and expand capacity. These factors have driven strong sustained earnings and dividend growth for self-storage REITs.
The best performer over the past decade is Extra Space Storage. It has produced a 490% total return (19.4% annualized), which has more than doubled the Dow's roughly 200% (11.7% annualized) total return during that time frame. Extra Space has also significantly outpaced the Dow in the last three and five years.
A big driver of the company's strong total returns is its growing dividend. Extra Space has delivered sector-leading dividend growth of 650% over the last decade. Fueling that surging dividend has been Extra Space Storage's best-in-class core funds from operations (FFO)-per-share growth of around 700% over the past 10 years.
Extra Space has benefited from several growth drivers, including rising rental rates, acquisitions, and its third-party management platform. The company is a leader in third-party management, with 886 locations out of its 2,337 store portfolio. This platform provides capital-efficient growth, enabling the company to generate additional income streams from management fees, tenant insurance, and loan interest for a minimal investment. The platform also provides an acquisition pipeline, as it can acquire managed properties when the owners are ready to sell.
Extra Space should be able to continue growing its portfolio, FFO, and dividend at attractive rates in the future. The self-storage sector remains highly fragmented, providing Extra Space with many acquisition and management opportunities. Meanwhile, it has a strong balance sheet to continue funding new investments.
