Good dividend stocks held over a long period of time will produce strong gains for a patient investor. But if you buy a stock at the wrong time, it can be painful watching it drop 10%, 20% or more, and it takes courage to hang in there until it comes back.
Many investors found this out the hard way with real estate investment trusts (REITs) in 2022 as inflation, Federal Reserve interest rate hikes and fears of recession produced losses in over 80% of the total universe of REITs.
Take a look at one REIT that, despite a rough 2022, has a long-term history attractive to any investor:
Extra Space Storage Inc. EXR is a Salt Lake City self-storage REIT with over 2,300 locations in large metropolitan areas across 41 states as well as Washington, D.C. It was founded in 1977 and has become the second-largest operator of self-storage facilities in the U.S. Since 2018, it has acquired $4.6 billion in new properties.
Extra Space Storage’s performance history is exemplary. Since August 2004, Extra Space Storage’s total return is 1,439.59% — or 2,497% for those who reinvested dividends instead of collecting the cash. Even the last five years — despite the headwinds of COVID-19, inflation and possible recession — have produced total returns of 112.57% for Extra Space Storage.
Compare those returns with a REIT like Realty Income Corp., perhaps the most popular REIT among dividend investors. Realty Income’s total return since 2004 is about 423%, or 752% with reinvested dividends. But Extra Space Storage’s total returns are more than threefold better.
Over the last five years, Extra Space Storage has also grown its dividend from $0.78 to $1.50 per share, an increase of 92%. The annual yield of $6 per share on its most recent closing price of $153.82 was 3.9%. Forward funds from operations (FFO) of $8.40 gives Extra Space Storage an FFO payout ratio of 71% — perhaps not ideal but still well covering the dividend without much risk of a cut in the future.
Still, 2022 was not kind to Extra Space Storage, as the stock was decimated and finished with a total return of negative 30.13%. It was one of its worst years ever. Even in 2020, its total loss was only about 10%. So with 2023 starting off as more promising and the stock up 6.6% so far, is now a good time to buy Extra Space Storage?
It seems so. Third-quarter earnings were excellent, as FFO of $2.21 was well above the FFO of $1.85 in the third quarter of 2021. Revenue of $498.9 million easily bested $351.36 million in the third quarter of 2021. Its storage rental occupancy rate was 95%.
Extra Space Storage also seems to be gaining favor with Wall Street. This week, Raymond James analyst Jonathan Hughes upgraded Extra Space Storage from Market Perform to Outperform and announced a price target of $170. This represents a potential 10.5% upside from its most recent closing price of $153.82.
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There have been concerns that a recession would induce more storage renters to cancel leases upon renewal, but much of that is probably already priced into the stock price. There is a counterargument that apartment and home renters adversely affected by a recession could downsize, thereby needing to rent storage facilities for the possessions that no longer fit into smaller living spaces.
With the consumer price index report coming in with a slight 0.1% decrease in December, the Fed may begin to rethink the severity of future rate hikes. That would also bode well for Extra Space Storage and certainly improves its chances for reversing last year’s performance in 2023.
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