3 Unknown but Amazing Dividend Stocks

MarketsMotley Fool

It's no secret that great dividend stocks are often the source of consistent wealth creation over time. But what might come as a surprise is that some of the best dividend stocks aren't always those with the most publicity. Some of the most extraordinary dividend stocks are unknown to investors.

With this in mind, we asked three of our Foolish investors to offer up one unknown but amazing dividend stock that they believe investors would benefit from looking into. Making the list were apartment-based real estate investment trust AvalonBay Communities (NYSE: AVB), storage-facility operator Public Storage (NYSE: PSA), and online pet pharmacy PetMed Express (NASDAQ: PETS).

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Home is where the dividend yield is

Sean Williams (AvalonBay Communities): Apartment-based real estate investment trust (REIT) AvalonBay Communities isn't exactly a name that rolls off investors' tongues, but for those looking for incredible dividend growth and a superior yield relative to the average yield of the S&P 500, this stock could be for you.

What allows AvalonBay to separate itself from its apartment-leasing competition is its clientele. AvalonBay specifically focuses on a more affluent renter, which serves a number of purposes. To begin with, renters with a higher monthly or annual income are able to shrug off hiccups in the economy much easier than renters with less financial flexibility. This means fewer financial issues with renters and a more consistent occupancy rate.

AvalonBay also tends to concentrate on cities with a higher potential for real estate and rental-price appreciation. The expectation is already there from potential and current renters that they're going to be paying an above-average rental rate, which tends to play in favor of the company's rental pricing power.

What's more, the Federal Reserve's monetary tightening is playing right into the hands of AvalonBay in the near term. While it does make borrowing to build new apartment communities more expensive, it also pushes renters who are on the fence about purchasing a home back into renting. The Fed has increased its federal funds target rate by 125 basis points since December 2015, and every hike higher provides more incentive for folks to keep renting as opposed to paying a higher interest rate with a mortgage.

In the company's third quarter, it reported a solid 10.9% growth in funds from operations per share on a 6.6% increase in sales. Best of all, pricing power remains modestly strong with an average 2% increase passed along across the country. Currently sporting a 3.1% yield that's been growing steadily since 2012, AvalonBay Communities is a sneaky-good income stock you should have your eyes on.

Storing gold

Daniel Miller (Public Storage): I think one unknown but amazing dividend stock is a company you have likely used in the past and drive by regularly: Public Storage, which owns and operates roughly 2,300 self-storage facilities across much of the nation with over 1 million customers.

The business model for Public Storage is simple: drive its top-line business by increasing occupancy rates, the number of facilities and square footage, and price. When management can identify supply-restricted markets, it can generate high rent per square foot and the company has proven in 2017 that it can generate occupancy rates in the mid-90%.

There are also a couple of factors that provide investors some measure of safety. One is that as baby boomers continue to downsize and require storage for their assets, it should create more demand for Public Storage's services. Another positive factor is that it has a chunk of its business in California, where there's a higher barrier of entry as the zoning regulations are strict and land is expensive.

Also, as a REIT, it must pay out at least 90% of its taxable income to shareholders, and its current yield sits at roughly 3.78%. If demand for storage space remains strong and management continues to find supply restricted markets, Public Storage could be a relatively unknown but amazing dividend stock.

A rising star in pet care

George Budwell (PetMed Express): Not many sub-$1 billion market cap companies would even consider paying a dividend. These types of companies, after all, are usually busy plowing most of their free cash into growing their business. And that's what makes the online pet pharmacy and supply company PetMed Express such a rare gem within the universe of income-generating stocks.

With a current market cap of $964 million, PetMed is one of the only small-cap healthcare companies to pay a regular dividend. Interestingly enough, this tiny, relatively unknown company also offers a respectable yield of 1.77%, and an attractive trailing payout of only 52.35%.

The "secret" behind PetMed's generous shareholder rewards program is the ongoing hypergrowth of its top line in recent quarters -- thanks to an influx of new customers, a healthy number of repeat customers, and a concerted shift in sales to higher-margin items in the flea, tick, and heartworm categories. As a result, PetMed's dividend appears to be sustainable for the long haul, and it should also have considerable room to grow moving forward.

While PetMed has drawn the ire of some veterinarians as a direct competitor for pet supplies and medicines, the longer-term trend definitely favors online pet pharmacies overall. Because these companies don't need to invest in physical locations, they can offer far steeper discounts than vet offices that supplement their income by selling pet-related products. And that's why it might be worth getting to know this under-the-radar dividend stock right now.

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Daniel Miller has no position in any of the stocks mentioned. George Budwell has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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