Shoulda, woulda, coulda -- nearly every investor has kicked themselves for not having made a move that, in retrospect, seems like it should have been a no-brainer.
I think there's one stock that's down by close to 33% right now that you'll regret not buying on the dip. That stock is Easterly Government Properties (DEA -0.74%).
Why Easterly stock headed south
Has Easterly's share price plunged because the real estate investment trust (REIT) is losing money? Nope. It continues to deliver solid profits and funds from operations (FFO).
The reason behind the stock's steep decline actually has nothing to do with anything that Easterly itself has done. Instead, it's mainly due to what the Federal Reserve Board has done -- aggressively raise interest rates. Its most recent rate hike of 0.25 percentage points came last month.
When the Fed boosts the benchmark federal funds rate, that negatively impacts Easterly in a couple of ways. The most important one is that the REIT's borrowing costs rise. At the end of 2022, Easterly's debt totaled $1.3 billion. Of that amount, $250 million are term loans that will mature within the next couple of years. Easterly could have to refinance that debt at higher interest rates than it is paying right now.
Another less obvious outcome of higher interest rates is that many investors find bonds a more attractive investment than REIT stocks when yields are higher. Bonds provide fixed rates of return and can be safer than dividend stocks when held to maturity.
An unstoppable stock
Despite the big sell-off, though, I think that Easterly Government Properties is an unstoppable stock for income investors. One positive effect of its lower share price is that it has lifted Easterly's dividend yield to over 7.6% -- near its highest level ever.
More importantly, that payout is about as solid as they come. Easterly's management frequently points out that most of its cash flow (which it uses to fund the dividend) is "backed by the full faith and credit of the U.S. government."
That's not just hype. Easterly, either directly or through a joint venture, owns 86 properties. All but one of them is leased to a U.S. federal agency. Roughly 97% of the company's total annual lease income comes from Uncle Sam.
The average weighted remaining lease term of Easterly's properties is 10.3 years. Sure, the company has several leases expiring in 2023 and 2024. However, it's a major hassle for any large organization to pick up and move. Easterly should be in a good position to renew those expiring leases. Last year, the REIT renewed all of the leases that expired.
Easterly's prospects appear to be bright. The U.S. government ranks as the world's largest employer. It's also the biggest office tenant in the country. Leasing properties makes more sense than buying, given federal budget constraints. Only one company has a larger market share in leasing to the federal government than Easterly -- and that company isn't publicly traded.
Buy on the dip
More interest rate hikes could be on the way. That isn't good news for Easterly. However, those hikes will probably be small ones. Sooner or later, though, the Fed will likely start to cut interest rates. When that happens, Easterly stock should take off.
Buying on the dip right now allows income investors to lock in an especially juicy dividend yield. It also positions them to profit if and when interest rate cuts provide a strong positive catalyst for Easterly's share price. I suspect that investors who wait to buy Easterly Government Properties stock until after rates start to come down will wish they'd bought in when its valuation was lower and its dividend yield was higher.
