7 Stocks For Dividend Growth And Retirement Income by Dirk S. Leach
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.
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.
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’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.
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