The S&P 500 has been on fire over the past year. The broad market index has rallied nearly 25% in the last 12 months. Most stocks in the S&P 500 followed it higher.
However, there’s a segment of the market that has underperformed: real estate investment trusts (REITs). Higher interest rates have weighed on real estate values and REIT stock prices. Several top-flight REITs currently sit about 15% or more below their 52-week high, including Realty Income (NYSE: O), Extra Space Storage (NYSE: EXR), and Mid-America Apartment Communities (NYSE: MAA). As a result, investors can buy these magnificent dividend stocks at lower prices, locking in higher dividend yields.
A steadily rising payout
Realty Income has a stellar record of growing its dividend. The diversified REIT has raised its payout 125 times since its public market listing in 1994 and for 107 straight quarters. It has grown the dividend at a 4.3% compound annual rate over that period, including by 2.1% last month.
With its share price falling and dividend payment rising, Realty Income’s dividend now yields over 6%. That’s multiples above the S&P 500’s dividend yield (1.3%).
Realty Income should have no trouble continuing to increase its dividend in the future. It has one of the strongest financial profiles in the REIT sector, supporting its view that it can grow its adjusted funds from operations (FFO)Â per share by 4% to 5% per year via rent growth and new investments in income-producing properties. The REIT should have no shortage of investment opportunities, given that there are trillions of dollars of commercial real estate it could acquire in the future.
Its third-party management strategy is paying big dividends
Extra Space Storage has grown its dividend briskly over the years. The leading self-storage REIT has boosted its payout by nearly 245% over the past decade, including 8% last year. With its payout rising and share price falling, Extra Space currently yields over 4.5%.
The REIT should be able to continue growing its dividend in the future. It’s benefiting from steadily rising demand for self-storage space as more Americans utilize storage. That’s keeping occupancy rates high, driving steady rent growth and expansion opportunities.
Extra Space has grown its FFO per share faster than its peers over the years, partially due to its leading third-party management platform. That strategy enables it to earn recurring management fees and other income for a low investment.
Extra Space also has a long record of acquiring properties, including those it manages. It made a needle-moving deal last year, acquiring rival Life Storage to create the country’s largest self-storage operator. With a strong balance sheet and leading third-party management platform, Extra Space has plenty of room to grow in the highly fragmented self-storage sector.
Rising rents should keep pushing this payout higher
Mid-America Apartment Communities recently declared its 122nd consecutive quarterly cash dividend. The apartment REIT has never reduced or suspended its payout in its more than 30-year operating history. The company has increased its dividend in each of the last 14 years, including by 5% last year. With its share price under pressure and payout on the rise, Mid-America yields over 4.5%.
The REIT has benefited from its focus on owning apartments across the fast-growing Sun Belt region. It has also capitalized on population and jobs growth, which has driven robust demand for housing. That has kept occupancy high across its portfolio, enabling the REIT to raise rents and build additional apartment communities.
Mid-America recently completed one development project and acquired two recently built communities late last year. It has five projects under development and expects to start four to six more over the next two years. Along with rent growth, the company’s expanding apartment portfolio should supply additional income to keep growing the dividend.
These magnificent dividend stocks are on sale
Rising rates have put downward pressure on REIT stock prices over the past couple of years. That’s enabling investors to scoop up shares of top-notch dividend-paying REITs, like Realty Income, Extra Space Storage, and Mid-America Apartment Communities, at lower prices and higher dividend yields. With more growth ahead, these REITs should supply investors with lots of income in the coming years. On top of that, they have strong upside potential as interest-rate headwinds fade.
Should you invest $1,000 in Realty Income right now?
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Matt DiLallo has positions in Mid-America Apartment Communities and Realty Income. The Motley Fool has positions in and recommends Mid-America Apartment Communities and Realty Income. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.
3 Magnificent S&P 500 Dividend Stocks Down 15% to Buy and Hold Forever was originally published by The Motley Fool
