Prologis (PLD 2.98%) might not stand out to dividend investors. While the warehouse giant's dividend yield of 2.8% is higher than that of the S&P 500 index (1.6%), it's not as high as others (the REIT sector's average is above 4%). Because of that, it might not be appealing to dividend investors who value yield above all else.

However, when put into the proper context, Prologis pays a top-flight dividend. Here's a look at what the company's CFO, Tim Arndt, had to say about the shareholder payout on the leading industrial REIT's first-quarter conference call.

An elite dividend growth stock

Arndt shared some observations about where the company stands compared to others in the S&P 500. He pointed out, "Today, we sit as the 68th largest company in the S&P 500 ahead of names like GEAmerican Express, Cigna, Citigroup, as well as Ford and GM combined." Prologis has grown larger than several iconic companies that are household names. It's the biggest REIT with a market cap of over $115 billion. 

Arndt then compared the company's dividend with other leading payers in the prestigious market index. The CFO stated:

With our planned $3.3 billion of dividends this year, we ranked 42nd in terms of total cash return to investors. Of these top 42 dividend payers, Prologis has outgrown the group by 500 basis points per year over the last three years. And in fact, since our IPO, we have paid over $15 billion in dividends at a 15% CAGR, ranking 13th on growth in the entire S&P 100. While getting bigger has never been our objective, we thought the context would be eye-opening.

As Prologis has grown in size, it has also grown shareholder value by rapidly increasing the dividend. Over the last five years, Prologis has grown its payout at a 12% compound annual growth rate, including by 10% earlier this year. That's twice as fast as the S&P 500 (6%) and REIT sector (6%). 

That rapidly rising dividend has helped drive market-beating total returns:

 PLD Chart

PLD data by YCharts

More dividend growth ahead

Prologis can grow its dividend at an above-average rate for the next several years. The primary factor driving that view is embedded rent growth. Rental rates on warehouse space have skyrocketed in recent years due to scorching demand and limited supply. Prologis is only capturing a portion of this rent growth because it leases most of its properties under long-term contracts with an average remaining term of four years. It can sign new leases at much higher market rates as they expire.

Arndt noted on the call that there's now a 68% difference between rents on its existing leases and market rates "as market rent growth remained strong and slightly ahead of expectations" in the first quarter. The CFO noted that this "represents over $2.85 per share of incremental earnings (implying about 50% growth in its funds from operations) as our leases roll the market, providing visibility to future income and dividend growth." The company estimates this embedded rent growth will drive its same-store net operating income up 8% to 10% annually for the next several years. 

That embedded rent growth is only one driver. Prologis also has an excellent record of growing shareholder value through development projects and acquisitions. The company has invested $40 billion to build almost 500 million square feet of new warehouse space over the last 20 years. These investments have created an estimated $11 billion in shareholder value. Prologis's vast land bank could support $39 billion of future developments.

The company's elite balance sheet gives it the financial flexibility to invest in new developments and make accretive acquisitions. Prologis bought rival Duke Realty last year in a $26 billion deal. It expected the accretive deal to immediately boost FFO per share while producing $375 million to $400 million in annual earnings and value creation. 

A top dividend stock

While Prologis' dividend yield might not wow investors, the company more than makes up for it with its ability to grow that payout. The industrial REIT has delivered elite dividend growth over the years. That should continue, driven by robust embedded rent growth, accretive acquisitions, and value-creating development projects. That growing dividend positions Prologis to continue producing strong total returns, making it an attractive option for those seeking income and upside potential.