Real estate has long provided some shelter from economic storms, and real estate investment trusts (REITs) can be a powerful way to grow wealth. That's true even when share prices are being buffeted by economic downdrafts, as REIT dividend payments keep the passive income going while investors wait for share prices to recover.
But you must choose well. One to consider for a long-term buy-and-hold now is Stag Industrial (STAG -1.86%). This industrial REIT has grown quickly and rewarded shareholders nicely in its dozen years of life, inspiring confidence that it can continue to build on that positive record.
Stag went public in 2011 and has expanded its portfolio from 14.2 million square feet and 93 buildings in 26 states to 111.6 million square feet and 563 buildings in 41 states. Over that time, this Boston-based trust also has provided a total return that has crushed that of two benchmark exchange-traded funds: the Vanguard Real Estate ETF and the Vanguard S&P 500 ETF.
STAG Total Return Level Data source: YCharts
Stag staged for a run in the industrial sector
Stag operates in a sector that appears to have a lot of room to run. Industrial space, especially warehouses, became hot during the pandemic as e-commerce exploded and businesses of all kinds switched from "just in time" to "just in case" inventory of both stuff they're selling and stuff they need to make stuff to sell.
Stag itself has a diverse client list, with only 17% of its rent coming from its 20 largest tenants, led by Amazon at 3% with no others accounting for more than 1%. The rest includes a rich mix of major air freight and logistics firms, distributors in multiple sectors, and manufacturers.
The company is coming off a year in which it saw a record level of same-store income growth. Looking ahead, President and Chief Executive Officer Bill Crooker said in the year-end earnings report, "Secular tailwinds in the industrial space coupled with our attractive portfolio positioning will continue to drive meaningful internal growth, and our defensive balance sheet should allow us to capitalize on opportunities throughout 2023."
The company expects to invest $300 million to $700 million in new acquisitions in 2023 while generating about $50 million to $200 million in property dispositions. It has a portfolio that is nearly fully occupied, replete with tenants paying either annual rental escalators of about 2.5% or 32% more in new and renewed leases, ensuring that the cash keeps flowing.
A dividend machine that should keep on humming
And that cash flow should keep this dividend machine humming. Stag pays monthly and has raised its dividend for five straight years. The stock now yields about 4.5% at a share price of about $33. A payout ratio of about 58% based on cash flow also makes the dividend look primed for further increases.
The annual dividend of $1.47 right now looks quite sustainable considering the company's funds from operations (FFO) stood at $2.21 per share at the end of 2022 after growing more than 7% in the past year. FFO is a key metric for assessing a REIT, and so is the ratio of share price to FFO per share. Stag's is currently about 14.9, much less than the 27.5 of Prologis, the giant REIT that's the largest warehouse owner on the planet.
The chart above shows how Stag stock has been beaten down by renewed concern about rising interest rates, inflation, and other macroeconomic factors plaguing the broader market. But analysts give the stock a consensus target price of $37.83, a nice upside approaching 15% if that plays out. That may or may not happen, of course, but Stag stock is up for the year and still appears to be a nice buy to consider for 2023 and beyond.
