Dividend growth stocks have a knack for delivering sizzling total returns. Over the last 50 years, dividend growers in the S&P 500 managed average annual total returns of 10.2%, according to data from Ned Davis Research and Hartford Funds. That has easily outpaced the broader market's 7.7% average annual total return during the same timeframe.
Three Motley Fool contributors were asked to suggest some examples of these dividend stocks that can add some steady sizzle to your returns. They came back with Crown Castle (CCI -0.67%), Equinix (EQIX -0.91%), and NNN REIT (NNN -0.66%). All three are real estate investment trusts (REITs) and all three have excellent track records of steadily increasing payouts.
Here's what these Motley Fool contributors had to say about the stocks and about why their dividends should continue rising.
This REIT pays with the help of telecommunications connectivity
Marc Rapport (Crown Castle): Since going public in 1998, Crown Castle has more than doubled the S&P 500's total return (11,160% versus 537%) while building itself into the nation's largest provider of communications infrastructure. It did that by providing a growing stream of dividends. The REIT now has a portfolio of more than 40,000 towers, 120,000 small cells, and 85,000 route miles of fiber cables.
Crown Castle's largest tenants are the big cellular carriers. But Crown Castle also does business with a myriad of customers large and small across a range of industries, including internet service providers. They depend on Crown Castle to provide the infrastructure that gives them connectivity in the 5G rollout going on across the country and around the world.
Crown Castle changed its business structure in 2014 and became a REIT, obliging it to return at least 90% of its taxable income to shareholders in the form of dividends. Since then, it has proved its chops as a provider of passive income, outperforming the benchmark exchange-traded fund Vanguard Real Estate ETF in both dividend growth and total return.
CCI total return level data by YCharts.
Since early 2022, the REIT has faced some headwinds from higher interest rates and the loss of income from Sprint's merger with T-Mobile. As a result, Crown Castle management expects the REIT over the next several quarters will likely fall short of hitting the target of 7% to 8% annual dividend growth it set a few years ago. But management also expects the REIT to eventually get back to hitting those target growth rates.
The guidance downgrade has hit the stock price short-term, which helped boost the dividend yield to 5.3%. Analysts rate the stock as a moderate buy and give the stock a consensus target price of $152.60, an upside of about 32% from the current price. The guidance isn't likely to have a significant effect on the dividend's ability to keep growing. Crown Castle boosted its dividend by an average of 9% over the past three years.
The essential nature of this infrastructure REIT's properties and technologies -- and its proven record of steady returns -- suggest the analysts are pretty accurate in their assessment. I own shares in Crown Castle and plan to buy more.
Surging dividend growth ahead
Matt DiLallo (Equinix): Data center provider Equinix has been a dividend growth machine since converting to a REIT in 2015. The company has increased its dividend payout at a sizzling pace, doubling it from its initial level. It most recently gave investors a 10% increase, pushing its yield slightly above the S&P 500's (at 1.8% versus 1.5%).
This leading data center REIT expects to continue delivering sizzling dividend growth, aiming to raise the dividend by more than 10% annually through 2027. Powering that plan is the continued rapid increase in demand for data infrastructure to transmit and store digital information as companies ramp up their investments in digital transformation and artificial intelligence (AI).
Equinix expects to invest $3 billion annually through 2027 to maintain and expand its data center capacity. That will help drive 8% to 10% annual revenue growth and 7% to 10% annual increases in adjusted funds from operations (FFO) per share.
The company can afford to expand its dividend faster than its cash flow because it has a low dividend payout ratio (43% at the end of the first quarter) and a much lower leverage ratio than its peers. That gives it ample financial flexibility to expand its data center platform while growing its dividend.
The company's robust growth doesn't currently factor in any acceleration from AI. But given the estimated $60 billion in digital infrastructure investment needed to support AI by 2026, this white-hot market could supercharge its payouts.
Equinix offers sizeable dividend increases and AI-powered expansion potential. Those features make it a great stock to buy this summer for those seeking a high-upside dividend stock.
Triple-net lease REITs are highly stable payers
Brent Nyitray (NNN REIT): NNN REIT focuses on single-tenant retail properties operating under a triple-net lease framework. Triple-net leases require the tenant to manage all of the operating costs of the property including maintenance, insurance, and taxes. These leases generally go for extremely long terms (usually 10 to 20 years to start) and are expensive to break. NNN's typical tenant is a large corporation that has the financial strength to weather economic downturns.
NNN's biggest tenants by industry include restaurants, convenience stores, and automotive services. While restaurants can be affected by the economy, convenience stores and automotive services are generally highly defensive industries. Even if the economy is lousy, people still buy snacks and need parts to fix their cars.
NNN's property portfolio is concentrated in the South and the Southeast; the two biggest states are Texas and Florida.
It has issued guidance for core FFO to come in between $3.14 and $3.20 per share in 2023. REITs tend to use funds from operations to describe earnings because depreciation and amortization are such large costs under generally accepted accounting principles. Since depreciation and amortization are noncash charges (you don't write checks for them), REITs tend to strip them out in order to give the investor a better idea of the company's cash flows.
At current levels, NNN REIT trades at 13.6 times 2023 FFO per share, a reasonable multiple for a high-quality REIT. The company pays a $0.55 per share quarterly dividend, which gives it a yield of 5.11%. It's a good stock at a good price for income investors.
