Real estate investment trusts (REITs) are designed to pass income on to shareholders, making dividends a key investment consideration. But you can't think about dividends alone, which is important when you compare industrial REITs STAG Industrial (STAG -1.86%) and Americold (COLD -1.19%). Here's some key facts to consider if you are looking at this pair of dividend stocks.
1. Yield
Since REITs are dividend vehicles, it makes sense to start the comparison of STAG and Americold by looking at their dividend yields. The clear winner here is STAG, which offers a roughly 4% dividend yield today. Americold's yield is much lower at 2.8%. In fact, it's even lower than the 3.5% yield of the average REIT, using the Vanguard Real Estate Index ETF as a proxy. If maximizing current income is your goal, STAG is the best bet.
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2. Dividend growth
Dividend yield is only one way to look at the dividend, however. Over the past five years STAG's dividend has grown a total of just 3.5%. That's a tiny number, especially compared to Americold's dividend growth of 57%! But take that figure with a grain of salt, because the REIT held its initial public offering (IPO) in early 2018. The REIT's first dividend payment was actually for a partial quarter, so it was prorated and, thus, artificially small.
STAG Dividend data by YCharts
If, instead, we compare dividend growth since the start of 2019, which would be Americold's first full year as a public company, the numbers are a lot closer. STAG's dividend growth comes in at an even less-inspiring 2.5% with Americold at 10%. Americold still wins on the dividend growth front, but the difference isn't as dramatic.
But there's another wrinkle here. Americold hasn't actually increased its dividend since April of 2021 (more on this in a second). So while STAG isn't exactly a dividend growth machine, there's a reason to question the dividend growth potential that Americold offers.
3. The business
STAG owns warehouses and similar structures that are the basic foundation of most industrial REIT portfolios. Its model is fairly simple: Buy a property and rent that property out to a customer, or multiple customers. Assuming that it selects solid properties and they are in good locations, things should run pretty well. In the third quarter of 2022, STAG's occupancy was 96.4%, so it is safe to say management is executing well.
Americold owns a portfolio of temperature-controlled warehouses. These properties are largely used to transport food and there is a service component to the business, which makes up around 12% of revenue. Under normal circumstances, operating integral infrastructure in the food industry would be considered a very good niche, given the importance of, you know, eating.
However, since the coronavirus pandemic hit in 2020, the food sector has been experiencing supply chain issues. That left Americold's properties operating at less than full capacity. The double whammy here is that with less in the company's warehouses there's less service revenue to earn.
That said, the supply chain bottlenecks are getting ironed out and Americold's business performance is improving. To put some numbers on this, economic occupancy in the third quarter of 2021 stood at about 76% while occupancy in the third quarter of 2022 was a touch over 80%. Still, investors should probably view the REIT as more of an operating business than a simple landlord.
Business disruptions, like recessions, can have an immediate impact on Americold while STAG's leases will generally provide it a bit more protection. The big test for Americold from here will be a return to dividend growth, though it has clearly proven that it is willing to support the payment during a period of adversity.
4. Dividend coverage
STAG's funds from operations (FFO) payout ratio in the third quarter of 2022 was 65%. That's a very good number, leaving ample room for adversity before the dividend would be at risk. By comparison, Americold's FFO payout ratio was 88% in the third quarter of 2022. To be fair, the headwinds the REIT is facing have a lot to do with that relatively high payout ratio. Yet from an investment standpoint, a nearly 90% payout ratio does not suggest a quick return to dividend growth even though that number is far better than the nearly 96% payout ratio in the third quarter of 2021.
A holder and a watcher?
For investors seeking out a reliable, though perhaps not exciting, industrial REIT, STAG Industrial is the hands-down winner in this matchup. It has a more stable business model that is performing better right now. And, on top of that, the REIT's yield is higher.
That said, early indications were that Americold was looking to be a growth-oriented REIT, with a focus on a rapidly increasing dividend payment. The pandemic upended that plan to some degree, placing a material amount of strain on the REIT's dividend-paying ability. It's not a bad REIT and is, in fact, navigating a difficult period for its niche temperature-controlled properties relatively well. But dividend growth investors might still be better off keeping it on their watch lists until dividend growth resumes.
