The problem with dividend growth stocks is that investors often afford them a premium valuation. Given the dividend yield equation, that basically translates to a lower yield. However, the stock market is near all-time highs right now, so the yield on the S&P 500 is disappointingly hovering at a little less than 1.3%. You can do much better than that with dividend growers like Agree Realty (ADC -1.13%) and Rexford Industrial (REXR -3.05%). Here's what you need to know about these high-yield dividend growth stocks.
Agree Realty is expanding rapidly
The past decade or so has been one of big changes for Agree Realty. This net-lease real estate investment trust (REIT) cut its dividend in 2011. At that point, the business was tiny, owning fewer than 100 properties and the bankruptcy of a single important tenant left it with no choice but to trim the payout. Agree is not that tiny company anymore.
In a little more than a decade, it has expanded its portfolio to include 2,150 properties. Along with that portfolio growth has come dividend growth, with the annualized increase during the past 10 years averaging almost 6%. That's about twice the historical rate of inflation growth and significantly higher than some of the largest names in the net-lease REIT niche. Now add in the attractive 4.6% dividend yield.
To be fair, it is much easier to expand a business when it owns 100 properties than when it owns more than 2,000. So perhaps Agree's growth slows from here. But it is focused on the retail sector, renting out single-tenant buildings to occupants willing to pay for most property-level operating expenses (which is what a net lease requires). This is a highly liquid and large market to play in, and there is no reason to think that Agree can't continue to grow, even at an elevated rate, in the future. And the yield looks historically high as well.
REXR Dividend Yield data by YCharts
Rexford is super focused, but on a very good market
Rexford Industrial is a vastly different REIT. For starters, as its name implies, it invests in industrial properties. But there's another little difference that's important. Agree has a geographically diverse portfolio, while Rexford is solely focused on owning industrial properties in Southern California. From that perspective, it looks like a fairly risky stock.
However, Southern California is one of the largest industrial markets in the world, let alone in the U.S. It is a key transportation hub for products coming from Asia. It is also chronically supply constrained, with older properties often getting repurposed for housing. And there are strict regulations that would make it hard to build new industrial properties even if someone wanted to. If you had to pick only one region in which to invest in industrial properties, it would likely be the one that Rexford chose.
That has led to a very rapid rate of expansion, with the biggest indication of that being the huge annualized dividend growth rate of nearly 17% during the past decade. The yield is 3.2% or so, but that's still more than twice the level of the S&P 500 index. And given the shockingly rapid dividend growth, a premium valuation seems warranted relative to other REITs.
What about future gains? Rexford has multiple levers to pull. For starters, it has been able to jack up rents in a big way as leases expire. Second, it has been acquiring assets. Third, it has a long history of redevelopment, which increases the rent it can charge for a property. Management believes it can boost its net operating income by 47% by 2027 with just the assets it currently has in its portfolio. If it can get close to that figure, it is highly likely that dividend growth will remain impressive.
Act now while the opportunity still exists
So why would strong dividend growth stocks like Agree and Rexford have historically high yields? The answer is that investors raced to get away from REITs when interest rates rose, a change that increases costs for property owners. But property markets have historically adjusted to higher rates over time and will likely do so again. That means long-term dividend growth investors have what looks like a unique opportunity to add higher-yielding dividend growth stocks to their portfolios if they act quickly on Agree and Rexford.
