STAG Industrial: Store your Profits at this Warehouse REIT

04/02/2018 5:00 am EST

Focus: REITS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

We haven’t had a REIT in our portfolio for some time, because anticipation of Fed rate hikes has made the sector volatile and unrewarding in recent years, explains income expert Chloe Lutts Jensen, editor of Cabot Dividend Investor.

However, I suspect rate hike expectations have plateaued for now. Markets already expect three or four hikes this year, and while more are theoretically possible, that would represent an extremely hawkish—and improbable—turn from the Fed.

I’ve had my eye on STAG Industrial (STAG) for a while. I like the REIT’s focus on warehouses (over 80% of their 356-property portfolio), which are in high demand from e-commerce companies competing to ship faster and faster.

The Federal government is also a major tenant. And I like their track record: funds from operations (or FFO, a widely-used measure of REIT cash flow) have increased every year since the REIT came public in 2011. Last year, adjusted FFO increased by 29%.

Most importantly, the REIT pays monthly dividends. STAG’s history of dividend payments isn’t long (seven years), and its pace of dividend growth is slow (about 3% over the past five years), but payments have been steady and the stock’s payout ratio is reasonable for a REIT (84% based on FFO).

Finally, the stock is at an attractive entry point. STAG just completed a 20% correction as interest rates surged, finally finding support in early February. That’s a big drawdown (risk is always higher with high-yield stocks) but presents a good buying opportunity for us. It also defined a nice support level around 22.50 to watch should things go South.

I’ll be adding STAG to our High Yield portfolio. Investors with high risk tolerance looking for high monthly income can do the same. Word of warning to the tax-sensitive: the dividends don’t qualify for the lower dividend tax rate.

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