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Monthly Dividend Stock In Focus: STAG Industrial


Updated on September 22nd, 2024 by Felix Martinez

The real estate industry is a great place for investors seeking yield. Intuitively, this is not surprising. Real estate owners collect predictable income from their tenants. Thus, the real estate business is qualitatively geared toward owners wanting to collect periodic income.

One of the best ways for investors to gain exposure to the real estate industry is through Real estate Investment Trusts – or REITs.

STAG Industrial (STAG) is a commercial REIT that focuses on leasing single-tenant industrial properties throughout the US. The stock’s current dividend yield of 3.8% is more then double the 1.6% average yield in the S&P 500.

Moreover, STAG Industrial pays monthly dividends (rather than quarterly). This is highly beneficial for retirees and other investors who rely on their dividend income to cover life’s expenses. There are currently 78 monthly dividend stocks.

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Thanks to its high yield and its monthly dividend payments, STAG Industrial has the potential to be a great investment for income investors, particularly since the company has a long runway of growth ahead.

Business Overview

STAG Industrial is a Real Estate Investment Trust, or REIT. It is an owner and operator of industrial real estate. It is focused on single-tenant industrial properties and has 559 buildings across 40 states in the United States. The focus of this REIT on single-tenant properties might create higher risk compared to multi-tenant properties, as the former are either fully occupied or completely vacant.

However, STAG Industrial executes a deep quantitative and qualitative analysis of its tenants. As a result, it has incurred credit losses that have been less than 0.1% of its revenues since its IPO.

Source: Investor Presentation

The company typically does business with established tenants to reduce risk. Moreover, STAG Industrial has limited exposure to any specific tenant. STAG has an added advantage thanks to its exposure to e-commerce properties, which gives it access to a key growth segment in real estate.

The penetration rate of e-commerce is expected to grow from 14% in 2021 to 30% by 2030. This secular shift in consumer behavior will provide a strong tailwind to the business of STAG for the next several years.

STAG is currently facing a headwind due to the rise of interest rates. However, the effect of the higher interest rates on the REIT has been limited so far, thanks to the high credit profile of its tenants.

Some REITs view single-tenant properties as risky because these properties are viewed as a binary proposition; they are either fully leased or empty. However, focusing on single-tenant properties creates mispriced assets, which STAG can add to its portfolio at attractive valuations. This is central to STAG’s strategy and is a key differentiator among competitors.

STAG’s addressable market is in excess of $1 trillion, a significant portion of which is made up of single-tenant properties. The sector is highly fragmented, meaning that no particular entity would have a significant scale advantage. This is why STAG believes it can purchase mispriced assets.

STAG finds this to be an attractive mix of assets, and combined with relatively low capex and high retention rates, it has created a strong portfolio of industrial real estate.

STAG’s tenant profile reflects the vast diversification it has built into its portfolio. This diversification mitigates the risk of owning single tenant properties to a great extent. STAG has done a nice job of taking a relatively risky sector of real estate – single tenant properties – and building a portfolio in such a way that it greatly reduces that risk.

Growth Prospects

STAG Industrial’s growth since its IPO in 2011 has been impressive from both a fundamental and an investor return perspective. Fortunately, this real estate trust still has ample room for future growth.

The company reported its financial and operating results for Q2 2024, showing strong growth. The company achieved net income of $0.33 per share, up from $0.29 in Q2 2023, with total net income rising to $59.7 million. Core FFO per share grew by 8.9% to $0.61, while Cash NOI increased by 10.3% to $148.4 million. Same Store Cash NOI also saw a 6.1% rise to $138.2 million.

The company made significant moves in the quarter, acquiring 10 buildings totaling 2.2 million square feet for $225.6 million and selling seven buildings for $78.2 million. STAG’s portfolio maintained a high occupancy rate of 97.1%, with the operating portfolio at 97.5%. New leases covered 3.5 million square feet with significant rent growth, and 79.9% of expiring leases were renewed.

Moody’s reaffirmed STAG’s Baa3 rating and upgraded its outlook from ‘Stable’ to ‘Positive’ in June 2024. By late July, the company had addressed 94.7% of expected 2024 leasing activity, with a 28.9% increase in cash rent on new and renewed leases.

Source: Investor Presentation

Dividend Analysis

STAG is a high-dividend REIT. Its dividend is obviously very important, as investors generally own REITs for their payouts. STAG’s payout has grown every year since its IPO and stands today at $1.48 per share. However, dividend growth since 2015 has been minimal, averaging only 1.0% per year.

We do not see material growth in the dividend moving forward, but STAG’s payout ratio, which currently stands at 62% of FFO-per-share, provides a meaningful margin of safety for the dividend. We expect STAG to continue raising its dividend at a very slow pace for the foreseeable future in order to avoid ending up in a tight spot like it did in the earlier half of the trailing decade.

The payout ratio is down significantly from previous levels of near 100% back in 2016, as STAG has made a concerted effort to reduce the vulnerability of its dividend. However, that effort is still underway, and hence we see meaningful payout growth as unlikely in the near term.

The current payout ratio, combined with our expectations for mid-single-digit FFO-per-share growth in the coming years, should gradually improve the safety of STAG’s dividend. The trust has also made divestitures when pricing is favorable, an option it could use to temporarily cover dividend shortfalls. In short, we view the 3.8% dividend yield of the REIT as safe for the foreseeable future.

Final Thoughts

STAG Industrial has two characteristics that will immediately appeal to income investors: a 3.8% dividend yield and regular monthly dividend payments. In addition, the REIT has promising growth prospects and is reasonably valued right now. As a result, it can offer a total average annual return of about 7.1% over the next five years.

We like the trust’s strategy for long-term growth in a sector of real estate that investors sometimes ignore due to its perceived riskiness. Thus, STAG Industrial makes a good potential addition to a high-yield portfolio thanks to its high dividend yield, its monthly dividend payments, and leadership in the single-tenant industrial real estate market. Overall, STAG Industrial seems an attractive candidate for income-oriented investors, especially in the highly inflationary investing environment prevailing right now..

Don’t miss the resources below for more monthly dividend stock investing research.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

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