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Motley Fool Issues Rare “All In” Buy Alert
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All the top market indices fell into bear market territory on multiple occasions this year. As it sits, the S&P 500 is down about 17% year to date. Encouraging inflation numbers did improve investor sentiment for the time being and led some to believe the market is beginning to turn back toward growth.
While the market is still down, long-term investors might want to take advantage of some discounted pricing — particularly for dividend stocks. Since dividend yields have an inverse relationship with pricing, there are plenty of high-quality dividend stocks trading at stock prices creating yields 3 to 6 times higher than the average S&P 500 stock.
Three Motley Fool contributors were asked to write about a stock they believe you’ll regret not buying while the market is still down. They suggested Stag Industrial (STAG 1.58%), Realty Income (O 0.45%), and Medical Properties Trust (MPW 0.65%). Here’s a closer look at each.
Kristi Waterworth (Stag Industrial): There’s no doubt that the pandemic caused a significant shift in how people shop and companies maintain inventories, and no one has noticed this quite as strongly as real estate investment trusts (REITs). One, in particular, Stag Industrial, benefitted greatly from this shift. The REIT specializes in leasing out industrial properties (mostly distribution-focused warehouses) to companies that need to efficiently get goods distributed around the country.
There’s no doubt that the pandemic gave Stag Industrial a big bump, but it has maintained that trajectory since. Before the pandemic, the company’s free cash flow for 2019 was $27.7 million, but over the last two years, it’s rocketed upward with free cash flow of $179 million in 2020 and $175.8 million in 2021. For the trailing 12 months, free cash flow has grown to $242.2 million.
It’s not just making a lot of money relative to its pre-pandemic self. It’s taking that money to buy more properties, which it leases to quality tenants. Its top 20 tenants include such varied and notable names as Amazon, American Tire Distributors, FedEx, DHL Supply Chain, and Ford Motor Company.
For the first three quarters of the year, tenants of Stag Industrial renewed 48 long-term leases averaging five years, for a retention rate of over 68% and with a straight-line rent increase of over 20% on those renewals. The company also signed 26 new leases averaging 5.4 years, reflecting straight-line rent increases of 29.7%. With Amazon (its biggest tenant) representing just 3% of Stag Industrial’s revenue, the variety of companies that lease from Stag Industrial ensures that even if e-commerce or shipping were to slip significantly and require a smaller space down the road, very little would change with the underlying financials.
Stag Industrial pays out a dividend currently yielding 4.1%. The dividend is growing annually, although it is admittedly slowed growth lately (only 10.83% over the last three years). With the stock price down roughly 32% in 2022 partly over macroeconomic concerns about a potential recession affecting its tenants, Stag Industrial might be worth a closer look for long-term investors interested in stock sales.
Liz Brumer-Smith (Realty Income): When it comes to reliability, few stocks can compete with Realty Income. This net lease REIT has maintained 52 years of monthly dividend payments and increased its dividend payouts annually for 28 consecutive years, making it a Dividend Aristocrat.
The REIT primarily owns and leases retail real estate using long-term net leases (where the tenant takes care of expenses like taxes, maintenance, and upgrades). It also has a growing number of mixed-use and alternative properties in its portfolio like office space, multifamily housing, and hotels, among a few others. In total it has roughly 11,700 properties in its portfolio across three countries. The net lease business is super reliable, using leases of 10 years or longer with built-in rent escalators to big-name tenants in many different industries.
Everything Realty Income does, from acquisitions to reducing its balance sheet, is centered around maintaining its dividend increases and monthly dividend payouts. From 2021 through the third quarter of 2022 the company spent $11.5 billion on new acquisitions without compromising its financial position, as it still boasts an “A” financial rating.
General market volatility and concern over the impact of slowed retail spending pushed the stock down 10% this year. It’s currently trading around 18 times its adjusted funds from operations (AFFO), which isn’t a huge discount compared to some of its more beaten-up REIT peers. But it is still favorable pricing given the dividend dependability of the company. Its dividend yield is 4.6% today, which is 3 times that of the S&P 500. Plus, its dividend is safe considering its flush financial position and healthy dividend payout ratio of only 76%.
Mike Price (Medical Properties Trust): Economist Benjamin Graham famously said that in the short run the market is a voting machine but in the long run the market is a weighing machine. The implication is that short-term stock movements are based more on the emotions of traders and volume movements (voting) but in the long term the fundamentals of the business reign supreme.
Right now, Medical Properties Trust stock is under the control of the voters. The healthcare REIT’s stock price is down about 48% year to date. If the market were truly weighing the business’s fundamentals, you’d expect to see a close to 50% decrease in the cash flow and assets of the business.
Instead, the business is doing just fine. Adjusted funds from operations for the nine months ending Sept. 30 were higher than in the same period in 2021, and management expects normal rent escalations on existing properties of 4% next year. On the balance sheet side, equity is up $400 million from the end of last year.
The REIT is down along with most of the industry this year because of interest rates and inflation. Higher interest rates make it harder for REITs to expand and increase expenses when existing debt is refinanced. The economic environment is certainly not great for REITs, but is it bad enough to warrant a 50% stock price drop?
Medical properties trades for less than book value — 0.85 times; its five-year average is 1.43. The dividend yield of 9.38% is also well above the five-year average of 5.99%. The REIT has a great history with its dividend, too: The last time it fell was from 2009 to 2010. Since then, it has increased almost every year.
Investors who take a chance on Medical Properties now can enjoy an elevated dividend yield until the market calms down and properly weighs the REIT’s fundamentals.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kristi Waterworth has positions in Amazon, FedEx, Ford, and Stag Industrial. Liz Brumer-Smith has positions in Stag Industrial. Mike Price has positions in Medical Properties Trust. The Motley Fool has positions in and recommends Amazon, FedEx, and Stag Industrial. The Motley Fool has a disclosure policy.
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