Dividend stocks have historically been winning investments. Companies that consistently increase their dividends tend to outperform the broader market over time.
Vici Properties (VICI -0.93%), Extra Space Storage (EXR -0.63%), and Realty Income (O -2.66%) have proven this to be true. The trio of real estate investment trusts (REITs) have been big winners over the years. Here's why a few Fool.com contributors believe these dividend stocks still have lots of room to run.
This casino owner is a young REIT building an enviable record
Marc Rapport (Vici Properties): Gambling is not the same as investing. Placing a bet is a game of chance with little or no inherent value creation. When you invest, you buy shares of a publicly traded company with the expectation of seeing a nice return from its profitability and growth.
NYSE: VICI
Key Data Points
Either way, you're looking for a winner, and the owner of some of the most iconic gambling houses in the world might present just such an opportunity. That would be Vici Properties, the Caesars Entertainment spinoff that owns more than 50 casinos and other experiential properties, headlined by Caesars Palace, the MGM Grand, and the Venetian Resort on the Las Vegas Strip.
Vici Properties is a real estate investment trust that leases the properties back to the operators, much like any other equity REIT. A big difference is that those leases are often measured in decades instead of just a few years as is the case with, for instance, retail REITs.
Vici went public in 2018. The chart below shows how thoroughly its stock has scorched the two key exchange-traded fund benchmarks, the Vanguard S&P 500 ETF and the Vanguard Real Estate ETF, since then.
VICI Total Return Level data by YCharts
Will that continue? Well, its business is notably recession- and inflation-resistant. "The economic resiliency of gaming is resounding," is how Vici Properties managers responded to a question about that at the recent Nareit REITweek conference in New York.
Vici stock is currently selling for about $32 a share and analysts rate it a moderate buy with a consensus target price of about $37. In the meantime. you'll enjoy a yield of about 5% powered by five straight years of dividend increases.
That's comparable to a money market fund these days and offers a more likely reward than a spin at the slots. After all, the house inevitably wins -- why not own a piece of it?
These top performers are joining forces to become bigger and better
Matt DiLallo (Extra Space Storage): Extra Space Storage has been the best-performing real estate investment trust over the past decade. The self-storage REIT has delivered a nearly 390% total return (17.2% annualized), which has trounced the S&P 500's almost 230% total return (12.6%) annualized.
NYSE: EXR
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The company has produced sector-leading growth of core funds from operation (FFO) per share of 720.4% since 2011, driven by its growing portfolio (especially its leading third-party management platform) and rising rental income at existing properties. It has also delivered peer-leading dividend growth of 548% over the past decade. The REIT's growing earnings and dividends have helped drive its market-crushing total returns.
Extra Space recently took a step to drive future growth, agreeing to combine with fellow self-storage REIT Life Storage to create the largest such player in the country. Life Storage has also been a standout performer over the past decade. Its more than 335% total return makes it one of the five highest-returning REITs.
The self-storage REITs believe their combination will enable them to continue generating strong returns for shareholders. Extra Space expects the deal will be accretive to its core FFO per share in the first year. Meanwhile, it sees significant opportunities to drive future earnings growth, including capturing at least $100 million of annual operating synergies and improved property operating revenue. Extra Space also believes its increased scale will provide more opportunities to expand its third-party management, joint venture, and bridge loan platforms.
Over the years, Extra Space has been a huge winner by growing its self-storage portfolio. It's deal to combine with another top-performing self-storage operator will give it even more space to grow shareholder value in the future.
Realty Income has been a stalwart throughout the economic cycle
Brent Nyitray (Realty Income): Realty Income is a retail REIT that focuses on single-tenant properties under an unusual lease contract. These leases are called triple-net leases, which requires the tenant to absorb almost all of the operating costs of the property, including taxes, insurance, and maintenance. These leases generally last 10 years or more and have automatic escalators. They are also expensive to break, so the vetting process is crucial.
NYSE: O
Key Data Points
Realty Income focuses on companies with highly defensive business models, which means these companies are largely insensitive to the economy. This means that Realty Income's ideal tenant sells necessities, not discretionary items like fashion or sporting goods. The typical Realty Income tenant is a dollar store, drug store, or convenience store. Regardless of the state of the economy, people will still buy things like snacks, over-the-counter medications, and paper plates.
Realty Income has been around since 1969, and pays a monthly dividend. The company has a long record of consecutive dividend hikes, and even increased its dividend during 2020, when the COVID-19 pandemic shuttered many businesses and forced REITs to cut their dividends to conserve cash.
Realty Income is guiding for 2023 adjusted funds from operations to come in between $3.94 and $4.03. REITs generally use funds from operations to describe earnings because depreciation and amortization is a large expense under generally accepted accounting principles (GAAP); however it is a noncash charge. For most companies, this isn't a big issue, but for REITs it is.
At current levels, Realty Income trades with a price-to-AFFO ratio of 15.1 times, which is reasonable for a high quality REIT. The dividend yield is 5%.
