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7 Stocks for Dividend Growth and Retirement Income


Article by Dirk S. Leach on August 23rd, 2016

Let’s face it.  Stock valuations, in general, are getting frothy.

With all the major US market indexes making new highs and dividend yields falling in concert, it takes a lot of work to find even a handful of stocks with fair valuations and decent dividend yields.

Bond prices are likewise at all time highs driving bond yields to all time lows.  I’m so reluctant to put new money to work in either stock or bond mutual funds today, that I’ve stopped my automatic reinvestment of dividends and capital gains distributions in my fund portfolio. I’m waiting for a better time to add money into the broader stock and bond markets.

I recently wrote an article entitled “Where to Stash Your Cash When the Markets Get Frothy” and I’ve been heeding my own advice of late by putting my excess cash flow into only “high yield” deposit accounts.  But, how much cash do you want to put to work at a return of one to two percent?

Fortunately, there are yet a few, in my opinion, stocks with valuations on the fair to low side.  The market has not yet fully recognized these stores of value.

This article presents six REITs and one yieldco that are not yet fully valued, have solid balance sheets and reasonable debt loads, have a history of earnings and dividend growth, and currently pay a respectable dividend.

The Magnificent Seven

“The Magnificent Seven” was a classic American western released in 1960.  It was based on a 1954 Japanese film entitled “Seven Samurai”.

So, you are probably wondering what in the world the seven stocks below have in common with “The Magnificent Seven” or the “Seven Samurai”.

A small town in Mexico and Japan respectively, hired seven very special gunfighters and seven special samurai warriors to help the town rid itself of a group of marauding bandits.  Luckily we have no bandits but we do, in my opinion, have seven very special stocks that will help us generate a stream of dividend income.

I spent the better part of last week screening stocks based on earnings history, dividend growth history, reasonable debt load, and future growth prospects.  Each of these stocks has some type of specialty niche, barrier to entry, or macro-economic trend that gives each one of them some advantage for future earnings.

So, what are these seven special stocks that are priced fairly for investment today?  The table below lists all seven in alphabetical order.

The Magnificent 7 Dividend Stocks

A summary of the investment thesis for each of the seven stocks is provided below some with links to a more complete analysis where available.

Chatham Lodging Trust (CLDT)

CLDT is a monthly dividend paying lodging REIT that invests in premium-branded, upscale extended stay, and select service hotels.  This category of hotels typically have higher profit margins than full service hotels with a higher growth profile due to higher consumer demand.

CLDT also has a coastal preference with 50% of its property portfolio located on the West Coast and 24% in the Northeast.  CLDT has the second highest exposure to West Coast markets of all U.S. lodging REITs.

CLDT is a small cap REIT but their small size has not hindered their ability to turn revenue into earnings.  CLDT stands out from the crowd of lodging REITs with the highest EBITDA margin compared to all of its peers at 44.7%.

I published a more complete article on CLDT here on Sure Dividend back on April 20, 2016 that interested readers can find here.  In this article, I’ve updated some of the key metrics contained in my earlier article.

The two charts below show CLDT’s dividend growth and FFO/share growth for the last 6 years.

CLDT Growth

Source:  Author

Readers should note that the dividend and FFO/share for 2016 are conservative estimates based on the current dividend payout and the company’s guidance for FFO.

CLDT’s FFO and dividend growth has been exceptional over the last 6 years but is showing a slowing of FFO/share growth in 2016.  This is due to the slowing of economic growth in the US.

Lodging REITs financial performance are closely coupled with economic growth.  When the economy does well, so do lodging REITs.  The economic growth in the US for the first half of 2016 was slow but it is expected to pick up in the second half.  If indeed economic growth picks up, so should CLDT’s bottom line.

CLDT compares favorably with its peers with respect to valuation.  The two charts below show CLDT’s dividend yield and Price/FFO compared to its lodging REIT peers.

CLDT Valuation

Source:  Author

CLDT’s yield of 6.2% is significantly higher than the average of the group at 4.85% and its Price/FFO is right on the average of the group at 7.6.  While it is possible to find higher yield in the lodging REIT group, you won’t find the combination of yield, low 58% dividend/FFO payout ratio, solid balance sheet, and history of dividend growth that CLDT offers.  I already own several hundred shares of CLDT and will likely add more to my holdings.

Hannon Armstrong Sustainable Infrastructure Capital (HASI)

HASI is a REIT that provides debt and equity financing for sustainable infrastructure projects that increase energy efficiency, provide cleaner energy sources, positively impact the environment, or make more efficient use of natural resources.  In that sense, HASI is a “green” company acting as a pseudo bank or financier for green energy infrastructure.

The company went public on November 7, 2012 and is headquartered in Annapolis, MD.  HASI has only been around for a little less than 4 years and therefore does not have a long track record to review.

However, in the few years that HASI has been public, it has done very well.  The two charts below show the dividend history and EPS history for HASI since going public in November 2012.

HASI Growth

Source:  Author

Astute readers will note that HASI’s dividend payout is nearly the same as HASI’s earnings per share.  Normally, a near 100% payout ratio would be a big red flag.

HASI does not have the cap-ex costs that the net lease or other equity REITs have, so HASI can pay out essentially 100% of its earnings.  Over the last 2 years, about 60% of HASI’s dividends have been categorized as return of capital due to available tax credits from a subsidiary company.

A more complete discussion on return of capital versus other dividend types, can be found at “Why Investors Need to Get Comfortable with Low Interest Rates & Dividend Stocks“.  The take away from the two charts above is that HASI’s EPS and dividend growth rates over the last four years are exceptional.

As noted above, HASI’s primary earnings metric is EPS and not FFO as used by equity REITs.  Understanding that HASI’s Price/Earnings is not fully comparable with Price/FFO, we can get an idea of how HASI stacks up with triple net REITs.  The two charts below show that comparison for HASI as well as a comparison of HASI’s yield versus its peers.

HASI Valuation

 Source:  Author

The take away from these two charts is that HASI’s price-to-earnings ratio is comparable to its peers Price/FFO and its dividend yield is on the higher end of the range.

What we are getting with an investment in HASI is a significantly higher growth rate of both earnings and dividend payouts and HASI has what appears to be a sustainable tailwind due to the global focus on increasing renewable power generation.

While HASI’s focus is on green energy infrastructure projects, I want to make it clear that HASI did not get any extra “points” or consideration in my analysis just for being “green”.  I evaluate and make recommendations for all stocks on the same fundamental basis and I have no metric for being “green”.

With that said, readers should recognize that there is currently a growing macro trend globally to increase renewable power generation and support “green” infrastructure projects.  HASI should continue to prosper as renewable power generation grows.

I don’t yet own shares of HASI in my personal portfolio but I have it on my watch list and will likely establish a position in HASI given an opportune dip in the market or REIT sector.  A more complete discussion on the benefits of buying on market dips can be found at “Are There Better Strategies than Dollar Cost Averaging?‘.

Iron Mountain, Inc. (IRM)

IRM has been around as a company for several years but only registered as a REIT effective January 20, 2015.  IRM is in the business of records storage and owns a couple of below ground storage caverns as well as above ground storage facilities.

IRM’s primary business is storage of physical records but has a growing footprint in digital data management and a smaller piece of the records destruction (shredding) business.

Record and data storage is an interesting business with both risk based drivers and regulatory drivers.  Corporations want and need to have the ability to recover from the potential destruction of their corporate headquarters including the availability of duplicate records.  IRM provides the service to store critical records in and retrieve critical records from secure storage facilities.

The regulatory drivers for storage of records come from several requirements.  Examples of regulatory drivers are requirements to hold financial and tax records for a minimum of 7 years and requirements to hold Federal government project design and engineering documents for the life of the facility or structure.  With our litigious culture in the US and growing regulatory requirements, IRM’s future business prospects are stellar.

On top of having the regulatory and risk based tailwind to its business prospects, IRM has built a near monopoly around records storage serving more than 94% of Fortune 1000 companies.  IRM has operations in 45 countries and on 6 continents serving more than 220,000 clients including a growing footprint in several fast growing emerging markets. In May of this year, IRM acquired Recall (a former UK corporation) in a deal valued at $2B giving it broad access to the UK market.

IRM’s financial metrics as a newly structured REIT don’t have much history.  However, we can take a look at IRM’s dividend growth and valuation comparison with other physical storage REITs.  The chart below shows IRM’s dividend payouts for the last 5 years plus a conservative estimate of the 2016 dividend payout.

IRM Growth

Source:  Author

IRM’s dividend growth at nearly 20% is impressive particularly given the $2B acquisition they just made in May.  Once the synergies of that acquisition are fully reflected in IRM’s operations, I expect to see a return to the historical dividend growth rate of ~20% per year.

I mentioned that IRM has a near monopoly in the records storage business and so it is difficult to find an apples and apples peer to IRM.  While not quite apples to apples, we can compare IRM to other physical storage REITs in the two charts below.

IRM Valuation

Source:  Author

What we can see from these latter two charts is that IRM has a higher yield than its peers and nearly the lowest valuation on a price/FFO basis.

Clearly IRM is undervalued by the market based on this comparison.  I don’t yet have a position in IRM but have it on my watch list.  Like HASI, I will initiate a position when the market provides a dip or correction.  I like my stocks cheap.

Omega Healthcare Investors (OHI)

OHI is an equity health care REIT will a heavy focus on skilled nursing facilities [SNF].  Earlier this year, the market and investors were rather downbeat on the skilled nursing business but the market is starting to come around to understand a couple of things.

Firstly, SNFs offer a much cheaper alternative for patients discharged from the hospital that still need a skilled nursing level of care.  The trend for hospitals is to get the patient the care that is necessary from the hospital but to then discharge that patient to a SNF, other rehabilitation, or home assisted care to minimize total costs for care.  I don’t see that changing with the pressure to control and reduce health care costs.

The second recognition by the market is the aging baby boomer generation entering retirement.  There are a lot of us and, in general we have the assets and insurance to pay for SNF care when needed.

The wave of baby boomers will be not only tall but long.  The boomer generation wave will take roughly 30 years to pass through the economy.  That wave will be a strong force propelling the growth and earnings of SNFs and REITs like OHI.  I wrote an article highlighting the impact of boomer retirements some time ago but it is still very pertinent to this discussion.  That article can be found here.

I already have a large position in OHI and periodically add to that position.  OHI is one of my core holdings.

Pattern Energy Group (PEGI)

PEGI is an independent electrical power producer with generation assets primarily in wind power with a small component of photovoltaic (PV).

The company is structured as a yieldco which is similar to a master limited partnership (MLP).  However, unlike most MLPs, PEGI is structured as a C-corp and is taxed like a normal corporation.  The bottom line with PEGI is that you receive regular dividends and at tax time, PEGI’s dividends are reported on a standard 1099-DIV.

PEGI is a relatively new yieldco having gone public October 2, 2013.  PEGI owns and operates 16 wind power facilities in the United States, Canada and Chile as well as a couple of small solar facilities in Japan.

PEGI has a total owned capacity of 2,282 MW.  Their facilities generate stable long-term cash flows in markets that have strong growth potential. Each of their generation facilities has contracted to sell its output or a majority of it on a long-term, fixed-price power sale agreement with a creditworthy counterparty.

Currently, 89% of the electricity to be generated by PEGI is being sold under these power sale agreements, which have a weighted average remaining contract life of approximately 14 years.  All of PEGI’s 16 initial generation projects are complete, up and running, and generating power.

PEGI has performed well since their initial public offering (IPO), having grown their dividend just short of 28% in the 2.8 years since their IPO.   The two charts below show PEGI’s dividend growth and the growth in cash available for distribution (CAFD).

PEGI Growth

Source:  Author

We can see from the charts that PEGI’s annual dividend growth is a solid 9.3% and CAFD growth an impressive 97.6%.  Some readers may not be familiar with the term CAFD but it is very similar to an MLP’s distributable cash flow (DCF).

Like MLP’s, yieldcos typically have very high depreciation deductions and therefore the typical earnings per share (EPS) is not a meaningful metric with respect to generating cash for distribution to owners.

PEGI has a solid balance sheet, is not overly leveraged, and easily generates sufficient cash to pay both its debt service and its dividend.  PEGI is also growing through both acquisition and organic development of additional renewable electrical generation facilities.

With corporations looking to increase their usage of renewable power, PEGI has had no trouble locking in long term power sale agreements at favorable rates.  With the global push toward a larger share of electricity generation from renewable power, PEGI is well positioned to continue to thrive.  For those readers wanting a more detailed investment thesis on PEGI, I published an article entitled “Pattern Energy Group is Designed for Dividend Growth Investing“.   Today, I have a small position in PEGI and will be adding to that position in the future.

Sabra Health Care REIT (SBRA)

SBRA is a Maryland corporation and operates as a self-administered, self-managed  REIT.  Through its subsidiaries, SBRA owns and invests in real estate serving the healthcare industry.

SBRA primarily generates revenues by leasing properties to tenants and operators throughout the United States and Canada.  SBRA was created as a spinoff from Sun Healthcare Group, Inc. on November 15, 2010.  Since that time SBRA has been working to diversify its tenant base away from its original reliance on Genesis, strengthen its balance sheet, and grow its business.

It has done pretty well at all three goals.  SBRA has moved from having Genesis as its sole tenant at the spinoff to Genesis representing less than 34% of SBRA’s revenue today.  The charts below show SBRA’s growth in FFO and its dividend payout.

SBRA Growth

Source: Author

SBRA has been able to grow its FFO at a compound annual rate of 13.5% and its dividend at a rate of 5.3%.  Given SBRA just recently resolved its outstanding loans on a hospital complex with favorable and profitable results, SBRA is now in better position to pay down some of its debt and bump its dividend payout.

I’m expecting to see a good financial report from SBRA for 3Q2016 and I’m expecting to see them on track to beat their 2016 guidance.  SBRA had been under a cloud because of the hospital complex loan issue and its share price languished.  Now that it has favorably resolved that issue, SBRA shares are moving higher.  In the last 3 months, SBRA’s share price has climbed 25%.  Even with that increase, it is yielding close to 7%.  Compared to its peers, SBRA is undervalued.  The two charts below show SBRA’s price/FFO and its yield compared to its peers.

SBRA Valuation

Source:  Author

SBRA is priced the same as OHI on an FFO basis but pays out a slightly better dividend.  SBRA also shares with OHI the tailwind created by the retiring baby boomers.

It will have the same 30 year wave of the boomers creating new demand for health care real estate and facilities.  I have a large position in SBRA today and recently added another few hundred shares.  I recently published a more detailed investment thesis on SBRA entitled “Sabra Health Care REIT:  Firing on All Cylinders”  for those looking for additional detail.

Whitestone REIT (WSR)

WSR is a self managed REIT that owns, operates and redevelops community centered properties. The company focuses on value creation in its community centers, concentrating on local service-oriented tenants located in communities with a high per capital income growing population.

WSR’s diversified tenant base provides service offerings including medical, education, casual dining, and convenience services.  The company was founded on August 20, 1998 as a non-publicly traded REIT headquartered in Houston, TX.  WSR went public on August 25, 2010.

Normally, I don’t invest in retail shopping center REITs and I make it a point to never invest in mall centered retail REITs.

WSR is not your run of the mill retail shopping REIT.

WSR is very selective in both the location of their investments and the tenants to which they lease.  WSR acquires or develops properties only in neighborhoods and communities with significantly higher than average per capita income that has a growing population base.  WSR preferentially leases to tenants in recession resistant businesses (medical services, dental services, education services, convenience stores, etc.).  This has been working pretty well for WSR.  The charts below show WSR’s growth of FFO and their dividend payout over the last 6 years.

WSR Growth

Source:  Author

The astute reader is looking at the first graph and asking, “Where’s the growth?”  A closer look at the two charts will show that WSR has chosen the route of paying out a dividend initially higher than its FFO.  Not until 2014 did WSR’s FFO actually cover their dividend payout.

There are basically two choices that a new REIT (or any company) is faced with at their IPO with respect to dividends.  One is to pay out a dividend that the company can afford and increase that dividend as FFO (or earnings) allows.  The other choice is to establish a dividend greater than can be covered at the IPO but that the company can grow into over a few years.  WSR clearly chose the latter approach.  Given WSR started fully covering its dividend in 2014, and now has a FFO payout ratio of 81%, I expect to see the dividend start to grow.  It is also worth mentioning that WRS pays it dividend monthly; it is one of the best monthly dividend stocks available today.

When compared to its peers, WSR looks to be significantly undervalued.  The charts below show WRS’s price/FFO and its dividend yield compared to its peers.

WSR Valuation

Source:  Author

Clearly from these two metrics, WSR is highly undervalued compared to its peers.  It is the cheapest with respect to price/FFO and has the highest yield by a significant margin.  I recently published a full article on WSR entitled “This Fast Growing Small Cap Monthly Dividend REIT Has a 7.3% Yield” for those readers wanting a more detailed discussion.  I don’t yet have a position in WSR but I will likely be initiating one within the next couple of weeks.

Closing Thoughts

Dividend growth and income investing has been very successful, especially over the last couple of years.

As equity prices rise and yields shrink, the natural tendency is to reach out further for yield and accept higher risk and weaker balance sheets.

At this time, it is particularly important to balance yield, earnings growth, risk, and leverage and not simply reach for the highest yield.

I believe these seven stocks provide that balance.  My belief is strong enough that I’ve either already invested in these stocks or plan to within the next few weeks.


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