Real estate investment trusts (REITs) have been very enriching investments over the long term. According to data from The Motley Fool, REITs have outperformed stocks over the last 20+ years. That's due in part to their ability to steadily increase their dividend payments.
Stag Industrial (STAG 0.69%) has delivered an average annual total return of 13.8% since its initial public offering in 2011. At that rate, the REIT could help make you a millionaire by the time you retire.
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The math to $1 million
Stag Industrial has produced an above-average total return throughout its history, considering that the average stock market return is around 10% annually over the last 50 years. Stag's higher returns enable an investor to become a millionaire faster. For example, if you invested $250 a month into a stock that delivers a 13.8% average annual return, you'd become a millionaire in about 30 years. That compares to approximately 37 years by investing $250 a month in a stock that produces a 10% annual return.
Stag Industrial's formula for success
Stag Industrial invests in a diversified portfolio of industrial properties secured by long-term leases with built-in rental escalation clauses. The industrial REIT's portfolio produces steadily rising net operating income (NOI). Its current leases escalate rents at a 2.9% weighted average annual rate. Meanwhile, market rents have been growing faster than embedded lease escalation rates, enabling the REIT to sign new leases with higher rates as legacy contracts expire. Overall, Stag Industrial expects its same-property NOI to grow by more than 4% this year. This embedded growth supports the REIT's ability to pay an attractive monthly dividend (a 4% current yield) that steadily increases (Stag has raised its dividend every year since its IPO).
NYSE: STAG
Key Data Points
The company's other growth driver is new investments. Stag has invested an average of around $700 million per year into new income-producing industrial properties. It will often purchase properties with value-add upside potential, including vacant properties it can lease up, redevelopment projects, and properties with expansion potential. The REIT has also started investing in ground-up development projects. When combined with the embedded growth of its existing properties, these new investments help support an even higher growth rate in funds from operations (FFO) per share.
Stag Industrial funds new investments with a combination of post-dividend free cash flow (it generates over $100 million per year), non-core property sales, and new debt and equity financing. The company has a conservative balance sheet to support its continued growth.
The REIT's combination of a 4% dividend yield and the potential to deliver a mid-to-high single-digit growth rate in its FFO per share positions it to potentially produce total returns above 10% over the long term. There's additional upside potential from valuation expansion. Stag currently trades at about 18 times its FFO, well below the nearly 26 times average multiple of its industrial REIT peers. A narrowing of its valuation discount would further enhance its total return potential.
A potentially enriching REIT investment
Stag Industrial has produced a strong total return since going public. The REIT is in an excellent position to continue growing shareholder value at an attractive rate in the future. That makes it an ideal investment for those seeking to build a million-dollar retirement portfolio.
