The last six weeks have shown that trying to guess the direction of share prices is a tough way to make money in the stock market. The previous two years made it look easy to generate great profits in the market. The reality is that the stock market is much more likely to be like the last two months. If you are a long-term investor with the goal of building wealth and income to support a comfortable future, you need a plan that is not based on guessing and chasing stock prices.
Income and total return focused investors have a powerful mathematical tool that few realize exists. The math is what happens between stock yield and dividend growth. Here is how it works. If a company increases its dividend, for the stock yield to stay the same, the share price must increase by the same percentage as the percentage increase of the dividend boost. Let me demonstrate with an example.
A stock yields 5% and the dividend is increased by 5%. The new yield is then 5.25%. For the stock to stay at a 5% yield, the share price must move up by the same 5%. The result is a 5% dividend income plus a 5% share price gain for a 10% total return. In the short to intermediate term, this share price to dividend growth relationship is not apparent. Too many short term “news” items pull share prices in this direction and that. Over the long term, history shows that the average annual total returns from quality dividend growth stocks end up very close to the average yield plus the average dividend growth rate.
The relationship works through market corrections and bear markets. The dividend paying stock prices will go down with the rest of the market, but the subsequent recovery will see stock price gains sufficient to bring the relationship back to expectations. An investor can boost the mathematical total return with dividend reinvestment.
The real estate investment trust (REIT) sector is a good place to find stocks with attractive yields and companies that increase dividends every year. I maintain a REIT sector database to track yields and annual dividend increases. I use the database to screen the REIT world for a range of income focused investment strategies.
Here are five stocks that score well on the total return potential of current yield plus dividend growth. The dividend growth rate is for the last 12 months, so as an investor your task is to review each company’s results and make your own analysis whether dividend growth will continue at the same pace, accelerate or slow down.
American Tower Corp (NYSE: AMT) is a large-cap REIT that develops and owns multi-tenant telecommunications real estate – cell phone towers. Over the last 12 months the company has increased its dividend by 20.7% with a dividend hike every quarter. Add the dividend growth rate to AMT’s 2.0% yield and you get 22.7% annual total return potential.
The recent dividend growth is not a fluke. Over the last five years, the company has grown the dividend by an average of 23% per year. The current yield is slightly above the average of 1.78%. The higher yield indicates that AMT may be slightly undervalued based on its market sector and dividend growth.
Hudson Pacific Properties Inc(NYSE:HPP) is focused on acquiring, repositioning, developing and operating office and media and entertainment properties throughout Northern and Southern California and the Pacific Northwest.
The company increased its dividend by 25% over the last 12 months. This continues the company’s record of low to mid-20% dividend growth for the last three years.
The current dividend is just 50% of FFO per share, which gives plenty of room for future dividend increases. HPP yields 3.15%, which is almost 1% above the company’s four-year average yield. This stock has strong potential for 20% plus total annual returns.
CoreSite Realty Corp (NYSE: COR) is one of the small number of data center REITs. The growth in data storage needs is truly on a parabolic trajectory. Data center REITs like CoreSite are experts at acquiring land, developing facilities appropriate for modern data storage server arrays, and providing high-speed Internet connections for companies leasing space in the data center facilities.
Over the last 12 months, CoreSite increased its dividend twice for a total increase of 22.5%. The tech sector needs for ever more data storage points to mid-teens or higher cash flow growth for the data center REITs for many years. COR currently yields 4.1%. Do the math on this stock’s return potential.
Equity Lifestyle Properties, Inc. (NYSE: ELS) is an owner and operator of lifestyle-oriented properties (properties) consisting primarily of manufactured home communities and recreational vehicle resorts and campgrounds. Equity Lifestyle owns high-end manufactured home communities located in popular retirement regions. This REIT has been a high dividend growth rate stock, growing the payout by 17% compounded per year over the last five years. The compounded growth results in dividends growing by 120% over the five-year period.
For the most recent 12 months, the ELS dividend has increased by 14.7%. The stock yields 2.27% compared to its four-year average of 2.33%. Remember for that yield to have stayed flat, the ELS share price appreciated by 15% per year.
Lamar Advertising Company (Nasdaq: LAMR) owns billboard, airport, and transit advertising assets. The company converted to REIT status at the beginning of 2014. At that point Lamar started to pay regular dividends with annual dividend growth of about 10%, including a 9.6% boost last year.
Compared to the stocks above, LAMR has a significantly higher yield at 5.0%. This REIT represents a different way to play the yield plus dividend growth equals total returns strategy. In the case of Lamar Advertising, the dividend growth rate is not as high, but the 5% yield is attractive cash return that can be used to compound share ownership.