The S&P 500 has delivered strong returns over the past year, rallying more than 25%. Most stocks participated in that rally.
However, a few stocks have lagged the market. Realty Income (O 0.55%) and Prologis (PLD 1.10%) stand out because they've declined more than 10% over the past year. On the positive side, investors can buy these magnificent dividend stocks at lower prices and much higher dividend yields.
Built to grow its dividend
NYSE: O
Key Data Points
Realty Income has been a fantastic dividend stock over the years. The diversified REIT, involved in retail, industrial, and gaming properties, recently declared its 647th consecutive monthly dividend. It raised its payment by 2.1% from the prior month's level, marking its 107th straight quarterly dividend increase. Realty Income has grown its payout at a 4.3% compound annual rate since its public market listing in 1994.
With its stock price sliding -- largely because of the impact higher interest rates have on REITs -- and its dividend payment rising, Realty Income currently offers a forward dividend yield approaching 6%. That's several times higher than the S&P 500's 1.3% dividend yield based on payments over the past year.
Realty Income should have no trouble increasing its dividend in the future. The REIT can deliver 2% annual adjusted funds from operations (FFO) growth from internally generated sources -- rent growth and investments funded with retained cash flow after paying dividends. It can add 0.5% to its adjusted FFO-per-share growth rate for every $1 billion of externally funded acquisitions it makes -- that is, those financed through stock sales and new debt). It aims to deliver 4% to 5% adjusted FFO per share growth each year, implying it will make $4 billion to $6 billion of externally funded acquisitions annually. That's easily achievable, considering it has made over $9 billion in acquisitions in each of the last two years.
With a 6% yield and 4% to 5% annual earnings growth, Realty Income should deliver an operational total return of around 10% annually with no change in its valuation multiple. However, there's additional upside potential as interest rates fall (lifting the value of commercial real estate), which many expect will occur over the next few years. That catalyst could enable Realty Income to deliver market-beating returns over the long term.
A reacceleration is coming
NYSE: PLD
Key Data Points
Prologis has delivered robust dividend growth in recent years. The leading industrial REIT has increased its payout at a 13% compound annual rate over the last five years. That's more than double the rate of companies in the S&P 500 (5%) and other REITs (5%). With its payout rising and stock price falling (again largely due to the impact of higher interest rates), Prologis' dividend yield has risen to more than 3.5%.
The company expects to continue growing briskly in the coming years. However, it will hit a bit of a speed bump in 2024. It envisions delivering core FFO per share growth of nearly 8% at the midpoint of its guidance range, down from its initial forecast of delivering over 9% core FFO per share growth this year.
Prologis is facing some temporary near-term headwinds. "A volatile and persistently high interest rate environment, together with mounting geopolitical concerns, contribute to this indecision and its short-term effect on net absorption," stated CEO Hamid Moghadam in the first-quarter earnings release. Those issues will impact occupancy and rent growth over the next quarter or two. However, the company remains very optimistic about the long term. It expects low market vacancy rates, limited supply growth, and strong demand to drive 9% to 11% core FFO growth through 2026. That should enable Prologis to continue delivering above-average dividend growth.
Add its dividend yield to its growth rate, and Prologis should easily produce double-digit total returns in the coming years. Tack on the upside potential from a higher valuation multiple as interest rates fall, and this REIT could be a strong performer in the coming years.
Great buying opportunities
Realty Income and Prologis have missed the S&P 500's rally over the past year, and now investors can buy these magnificent dividend stocks at lower valuations and higher yields. That could set investors up to earn higher total returns in the future.
