3 Reasons Self-Storage REITs Are Great Dividend Stocks

By Markets Fool.com

As anyone who's ever lived in one knows, there's one universal problem with apartments. It's stuff. Where do you put all your stuff?

-- Ralph Block, author, "Investing in REITs"

Continue Reading Below

With an average yield of 3%, self-storage REITs like Public Storage , Extra Space Storage , and Sovran Self Storage are intriguing income investments. However, to support their dividend payments, these companies need opportunity. Luckily, the self-storage industry has plenty.

1. Opportunity
According to Pew Research, just 26% of millennials between 18 and 32 are married. This is compared to 48% of baby boomers at the same age. Combine this with the massive amount of student loan debt hanging over millennials' heads, and it is not surprising that home ownership is lower than among preceding generations.

The black line in the chart below represents home ownership among young adults; as you can see, it's been trending downward.

Also, according to U.S. Census Bureau projections, "the population [of those] age 65 and older is expected to more than double between 2012 and 2060, from 43.1 million to 92.0 million." Without kids at home, and often living on a fixed income, boomers will likely look to downsize into apartments.

Continue Reading Below

As Block suggests, people are going to need a place to put their stuff, and I think this could generate substantial opportunity for self-storage REITs, which own and manage hundreds, even thousands, of self-storage facilities across the U.S. and, in some cases, internationally.

2. A durable industry
Growth is important, but great income investments are also dependable. What makes self-storage interesting is something Block suggested in his book, "Investing in REITs," which is that there is a case to be made for self-storage being recession-resistant. During downturns, "individuals and businesses cut costs by reducing the space they occupy," and this creates demand for storage.

Public Storage's performance over the last 15 years helps to further Block's case. As you can see, there were certainly some bumps in the road, but occupancy never fell below 85%, and rental rates have steadily improved.

While there will be some ups and down, this is a business that offers the most efficient solution to a substantial and, I believe, growing need. So, unless consumers and businesses suddenly stop accumulating stuff (which seems unlikely), self-storage is a great candidate for an industry you can buy and hold over the long term.

3. An advantage over competitors
It's not all roses for self-storage REITs -- there are limited barriers to entry, and that creates intense competition. For instance, Average Joe Entrepreneur can't build a new smartphone brand overnight, but hecould buy a self-storage facility.

However, Public Storage, Extra Space Storage, and Sovran Self Storage are not mom-and-pop shops. As public companies, they can issue shares of stock or bonds, and this better access to funding creates several key advantages.

They can build large and geographically diverse portfolios of properties, and this helps to generate more consistent streams of income, which helps protect them from a few poor-performing properties spoiling the bunch.

Moreover, by owning and managing a large chain of self-storage facilities under the same name, they can create recognizable brands. And while self-storage facilities are associated with places you keep non-essentials, that doesn't mean the items are meaningless. For this reason, customers may be willing to pay a premium to go with a more trusted brand name.


Source: Extra Space Storage Investor Relations Website.

Lastly, their financing advantage allows these companies to build on their brands by advertising more aggressively and, as you see above, improving the curb appeal of properties, which is likely to attract customers.

Three stocks for the watchlist
By operating in a stable industry, sporting above-average yields, and having a clear advantage over competitors, self-storage REITs are a great place to look for income investments.

But there is still work to be done -- mainly breaking down the individual businesses -- so I will not be buying today. Instead, I am adding Public Storage, Sovran Self Storage, and Extra Space Storage to my Motley Fool CAPSaccount to keep a closer eye on them. I suggest you do the same.

The article 3 Reasons Self-Storage REITs Are Great Dividend Stocks originally appeared on Fool.com.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.