STAG Industrial (NYSE:STAG) is a real estate investment trust, or REIT, that owns and operates single-tenant industrial properties. While each property is occupied by one company, the company does a good job of diversifying, in terms of both industry and geographical location.
STAG currently pays out an annual dividend yield of about 5.5% on a monthly basis (per S&P Capital IQ), and seeks to produce growth as well as income. Does this make STAG a good choice for income investors? What about those investors seeking solid long-term performance?
A little about STAG Industrial
STAG, which stands for Single Tenant Acquisition Group, presently has 221 properties that encompass up about 41 million square feet of leasable space.
The majority of these properties are warehouses, which account for about 82% of the company's annual rental revenue, and the rest is divided among light manufacturing and flex/office space.
The company focuses on industrial properties due to the attractive return potential, and because industrial real estate tends to be less volatile than commercial or residential. Also, industrial properties generally require less capital for tenant improvement costs. For example, it costs more to prepare a retail space for occupancy than it does an industrial warehouse.
Diversity and strong tenants means safety
STAG does not depend too much on any single tenant for income. In fact, no one company accounts for more than 2.6% of STAG's rental income.
Tenants are divided among more than a dozen different industries. The automotive industry occupies the greatest percentage of STAG's properties (about 13%), so weakness in any one industry won't decimate the company's profitability.
The company's portfolio is geographically diverse as well: properties are spread among 34 states, and no more than 10% of STAG's rental income comes from any one of them.
Finally, the average remaining lease term of five years ensures a relatively low turnover rate.
All of these factors mean STAG's income isn't too dependent on any one company, industry, or geographical location, and that tenant turnover is kept at a minimum.
Why do we care about monthly dividend payments?
Obviously, monthly dividends are desirable for investors who rely on their stocks for income to cover their living expenses. It's nice to get a "paycheck" every month as opposed to every three months.
However, what many growth investors don't realize is that monthly dividends actually increase the effect of compounded gains over time can actually produce higher investment returns from the same exact dividend. Simply put, the more often your returns are compounded, the faster your money will grow.
So not only does a monthly dividend mean more frequent income for those who need it, but it also gives your long-term performance a nice little boost.
Since going public in April 2011, STAG has delivered excellent returns, handily topping the S&P 500 and beating some sector-leading peers. Look at STAG's total return versus commercial REITs Realty Income and National Retail Properties.
Since switching to a monthly dividend schedule a little over a year ago, STAG has already raised the monthly payout twice. In fact, the annual dividend rate has increased by 27% since the company went public. Since the company is expected to earn substantially more than it currently pays out, I see no reason why these increases won't continue.
The current $0.11 per share monthly dividend add up to an annual dividend rate of $1.32. The company is forecast to earn $1.63 next year. Since REITs have to pay out 90% of their income to investors, STAG will most likely raise its payout substantially before the end of 2015.
Is it a buy?
REITs such as STAG are a great way for investors to obtain a solid stream of current income while creating potential for growth as the value of the company's properties increases over time. As property values rise, rent also tends to increase, producing rising income and higher intrinsic value for shareholders.
While past performance isn't necessarily indicative of future investment results, STAG has a solid business model that should provide investors with solid growth and income for years to come.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.