Investors in retirement or close to it often look to dividend stocks to provide a steady source of income without having to sell shares when the market is on a downswing. But retirees should be planning an investment strategy that will support them into their 90s, which means that the plan will need to include growth that will stand up to future inflation.
Three stocks that have a dividend yield greater than today’s paltry interest rates on savings accounts or government bonds and can protect your nest egg from the erosion of inflation are…
Prologis (NYSE:PLD), STORE Capital (NYSE:STOR), and AbbVie (NYSE:ABBV). Each of these businesses has a growth component, a strong history of dividend increases that exceed inflation, and the potential for capital gains when investors are holding shares for the long term.
One trend that shows no sign of slowing down is the growth of e-commerce. Not only are marketplaces like Amazon.com thriving, but many businesses in retail and manufacturing are finding it essential to have the ability to ship products directly to consumers in a matter of a couple of days or even less. This has created a huge demand for warehouses close to urban centers to support the broad selection of goods and delivery times consumers expect.
Enter Prologis, a real estate investment trust (REIT) that’s the world leader in logistics real estate. The company owns warehouses and distribution centers that it rents to retailers, manufacturing companies, logistics companies, and the U.S. Government. Prologis has been doing this for 36 years and has huge scale: It estimates the economic value of goods passing through its distribution centers in 19 countries every year to be $1.5 trillion, or 2% of the world’s gross domestic product. Its biggest customers are Amazon, Home Depot, FedEx, and Walmart, but Prologis is well diversified, and those heavy hitters contribute only 14.5% of its rental income.
What makes Prologis a good dividend stock for retirees is the growth component that the company brings to the portfolio. In the most recent quarter, core funds from operations (FFO), the equivalent of earnings for a REIT, grew 8.5% to $0.77 per share, and the company raised its guidance for full-year core FFO to $3.26 to $3.30, or an increase of 8.3% at the midpoint.
The current dividend yield for Prologis isn’t overwhelming at 2.5%, but the potential for growth makes up for that. The company raised its dividend by 4% this year and the payout has grown 26% over the last three years. Share-price appreciation has been a big part of the total return, as well. Shares are up 50% this year and 71% over the last three years.
With the e-commerce boom putting pressure on bricks-and mortar retail, you might think that a REIT that rents space to consumer-oriented businesses would not be a great opportunity. STORE Capital specializes in commercial real estate and counters that conventional wisdom with some particular characteristics are allowing it to thrive in this environment.
The “STORE” in the company’s name is actually an acronym standing for “single tenant operational real estate.” STORE Capital focuses on properties rented by single tenants that have a thriving and profitable operation at that particular location. STORE requires its tenants to submit financial statements to confirm that the location is profitable. Large chains tend to close their least profitable stores in times of financial stress, so STORE’s insistence that its tenants have a thriving, profitable business at that location helps keep occupancy high and its cost of capital low.
The company also focuses on middle-market tenants in the service sector such as restaurants, early childhood education centers, health clubs, and movie theaters. These are businesses that aren’t threatened by the e-commerce trend.
STORE continuously raises new capital through an “at the market” equity distribution — meaning it’s constantly diluting its shares by issuing new stock that it uses for acquiring new properties. But given that the company achieves net investment returns after operating costs of about 12%, the model is working to give shareholders compounding growth over time.
In the first six months of 2019, Store increased revenue 25%, thanks to 24% growth of its real estate portfolio. Adjusted funds from operations (AFFO) grew 25%, which translated to 10% growth in AFFO per share. The strength of the business model has attracted the attention of Warren Buffett, who owns an 8.2% stake in STORE Capital, the only REIT in Berkshire Hathaway‘s portfolio.
STORE Capital yields 3.7%, having just raised the dividend by 6% earlier this month. The dividend has risen 21% over the last three years, and shares have appreciated 44% in that time…
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