Dividend stocks are highly underrated as long-term winners. Most investors look to high-growth stocks to deliver market-beating returns for years at a time. But dividend stocks can be winners in multiple ways. Not only can share prices grow like other traditional stocks, but dividends can also grow. These factors combined can compound earnings and create reliable passive income streams.
One dividend stock I think has huge winning potential over the next 10 to 20 years is Invitation Homes (INVH 0.49%). The young real estate investment trust (REIT) has barely touched the surface when it comes to market reach and has already proved itself as a resilient and wildly profitable company.
1. Residential housing isn't going anywhere
Invitation Homes buys and develops single-family homes with the sole intention of renting them on annual leases. This business model is a time-tested method for investing in real estate and has proved to be one of the most resilient asset classes in the real estate industry.
Demand for rental housing ebbs and flows, but its necessity-based demand means it will never completely disappear. People will always need a place to live. If a market it operates in starts to see long-term declines in demand, the company can pivot its portfolio by expanding its presence in higher-demand markets.
I don't see that being a huge issue for Invitation Homes. The residential REIT currently operates in many of the hottest and fastest-growing real estate markets across the southern part of the country. But it's good to know the company has a massive market opportunity for expanding if it wants or needs to.
2. Its track record for growth is strong
Invitation Homes is a fairly young company. The REIT got its start as a private fund from alternative asset management company Blackstone in the wake of the Great Recession. After splitting from Blackstone, it went public in 2017 and has since seen its share price grow by 52%.
This growth isn't without reason. The company has expanded its portfolio of single-family rental homes by 73% to nearly 75,000 properties today. Its revenue and adjusted funds from operations (AFFO), a metric that works similarly to earnings per share, have jumped by 239% and 64%, respectively, over the past five years.
If we look at some of its more seasoned residential REIT peers, we see that share prices for these companies have grown in the range of 250% to 674% over the past 20 years. This indicates that continued share price growth for Invitation Homes isn't out of the question, especially considering its healthy track record and its opportunities to continue expanding. The REIT has a robust pipeline for new acquisitions, including distressed acquisitions, partnerships with home developers, and bulk purchases from larger equity firms.
3. Its dividend has a lot of room to grow
Its share price isn't the only reason this stock could be a long-term winner. In fact, its dividend potential is what really makes this stock stand out to me.
Right now its dividend yield is around 3%, which is on the higher end of the spectrum for its historic yield. The company has maintained a super-conservative payout ratio under 60% of its FFO, using the leftover cash to keep growing instead of paying more to its shareholders. While that has usually meant a disappointing yield in the range of 1% to 2%, it has helped the company grow at a faster clip.
And it hasn't meant the REIT has compromised growing its dividend, either. Over the past five years, it's bumped its payout seven times, equating to total dividend growth of 333%. Its low payout ratio means there's plenty of room for the company to maintain these dividend bumps. And once it's better established and out of its expansionary period, it could increase its payouts at a larger clip
INVH Dividend data by YCharts
Standard & Poors recently gave the REIT an upgraded credit score of BBB, which will help it secure more favorable financing terms. It's improved its debt ratios to more normalized levels by REIT standards, and it has no major debt maturities due until 2026, allowing it to use its $1.2 billion in liquidity to maintain its steady growth and dividend payments.
Invitation Homes has upside potential for its dividend and share price growth over the long term. While it may take time to achieve, I think this winning stock should have no problem delivering.
