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These 3 Dividend Stocks Are Anything but Average

Motley Fool - Sun Feb 4, 4:08AM CST

Many investors assume that dividend stocks are merely average investments. But over the last half-century, dividend-paying stocks in the S&P 500 have crushed the average stock's performance in that broad market index (9.2% average annualized return versus 7.7% for an S&P 500 equal-weight index). The best performance has come from stocks that grow their dividends (a 10.2% average annualized total return).

Public Storage(NYSE: PSA), Prologis(NYSE: PLD), and CareTrust REIT(NYSE: CTRE) stand out to these three Motley Fool contributors for their ability to deliver market-beating total returns. Here's why they don't want investors to miss out on these above-average dividend stocks.

Durable real estate with a fantastic balance sheet

Tyler Crowe (Public Storage): There are few businesses as durable as personal storage units.

Paying for a storage unit is one of those expenses people are hesitant to stop, and unlike long-term contracts for other types of commercial real estate, storage unit contracts tend to adjust to market rates sooner with shorter-term contracts. Self-storage real estate investment trusts (REITs) have been stellar investments over the years.

PSA Total Return Price Chart

PSA total return price, data by YCharts.

One business in this industry that stands out today as particularly interesting is Public Storage. While its stock has not performed as well as others over the past decade and its dividend increases have been sporadic, it has maintained a much more conservative balance sheet than its peers.

PSA Financial Debt to EBITDA (TTM) Chart

PSA debt to EBITDA (TTM), data by YCharts; TTM = trailing 12 months, EBITDA = earnings before interest, taxes, depreciation, and amortization.

Having a superior balance sheet and the capacity to borrow could be extremely valuable should interest rates remain high in 2024 and beyond. Companies facing debt maturities and potentially higher interest rates could be in the market to sell assets. Public Storage appears to be incredibly well positioned to take advantage of this.

Public Storage's dividend increases have been sporadic, but the REIT has either maintained or increased its dividend since 1990, and its current yield of 4% is on the high end of its historical average. A higher-than-average yield coupled with a chance to pounce on distressed assets could be a winning formula in the coming years.

A leader in dividend growth

Matt DiLallo (Prologis): Prologis has been a dividend-growth powerhouse. The leading industrial REIT has raised its payout at a 15% compound annual rate since its initial public offering (IPO).

That ranks it 13th in the S&P 100 (the 100 biggest publicly traded companies in the country) for dividend growth. It has continued to increase its payout at an above-average rate even as it has grown into one of the largest REITs.

Over the last five years, Prologis has raised its payout at a more than 12% compound annual rate. That's over twice as fast as the S&P 500 and REIT sector average during that period.

The company is in an excellent position to continue growing its above-average dividend (it currently yields 2.7% compared to 1.5% for the S&P 500) at a brisk pace. Prologis grew its core funds from operations (FFO) by 11% per share last year.

Meanwhile, it expects to deliver around 9% growth in core FFO per share in 2024 at the midpoint of its guidance range. That's at the low end of its projected average annual growth range of 9% to 11% in FFO per share through 2026.

Another factor driving Prologis' ability to deliver above-average dividend growth is its industry-leading balance sheet. It has the lowest weighted average interest rate among the largest REITs and the longest average remaining life on its debt.

Prologis also has a low leverage ratio and a sterling credit rating. On top of all that, it has a lower dividend payout ratio. Those qualities give it lots of financial flexibility to invest in high-return development projects and accretive acquisitions to accelerate its growth rate.

Prologis has also delivered above-average total returns (17.4% annually compared to 14.9% for the S&P 500 over the last decade). With its dividend likely to continue rising briskly, Prologis is ideal for those seeking an above-average dividend stock.

Benefiting from aging boomers

Jason Hall(CareTrust REIT): February 2020 through 2022 was brutal for CareTrust, which mainly owns skilled-nursing and senior housing properties, and leases them to operators.

During and immediately after the height of the pandemic, this was one of the hardest businesses to run, and many of its tenants struggled mightily. Over that three-year period, CareTrust's stock lost over 20% of its value; even after factoring in dividends paid, investors were down more than 6%.

Don't worry, I'm not here to highlight a below-average stock. To the contrary; when you zoom out and look at CareTrust's results since going public, even with the overhang of the pandemic, it's a best-in-class stock, and set to ride a very large tailwind in the decades ahead.

Since going public in late 2014, CareTrust has earned its investors 378% in total returns, nearly lapping the S&P 500.

CTRE Total Return Price Chart

CTRE total return price data by YCharts.

Part of those gains are a special dividend paid soon after being spun off Ensign Group, but a ton of value is from the 124% growth in its base dividend over that time.

Looking ahead, the aging of baby boomers continues to drive the need for more seniors-focused housing, skilled nursing, and memory care. With only 206 properties, CareTrust has significant room to continue consolidating market share. Maybe most importantly, it has probably the best cash flows and balance sheet of its peers, with a debt-to-EBITDA ratio of 5.7 and 35% debt to assets.

With a dividend yield of 5.3% at recent prices, a strong record of growing the payout, and a payout ratio of 80% of funds from operations, CareTrust is positioned to deliver extraordinary total returns.

Should you invest $1,000 in Prologis right now?

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Jason Hall has positions in CareTrust REIT and Extra Space Storage. Matthew DiLallo has positions in Prologis and Public Storage. Tyler Crowe has positions in Extra Space Storage and Prologis. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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