When shopping for your next dividend stock, don't just focus on how much each stock is paying now. Sure, big dividend payments are nice, but more important than that is the dividend's (and the stock's) potential to grow over time. With that in mind, two dividend stocks that could help you create a growing stream of income are EPR Properties (NYSE: EPR) and Public Storage (NYSE: PSA).
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Diverse and unique
EPR Properties is a REIT with a rather unique mix of properties. About half of the portfolio consists of entertainment properties, such as megaplex theaters and entertainment-based retail centers. The rest is made up of recreational properties, such as metropolitan ski parks, and education properties, like public charter schools.
The REIT owns just shy of 300 properties, and has a relatively low debt level, with its $2.2 billion in debt making up just 27% of its total capitalization.
Perhaps my favorite thing about EPR Properties -- other than its 5.2% dividend yield -- is that the company takes a relatively high-risk form of property and uses its lease structure and other property types to hedge against that risk.
It shouldn't come as a surprise that properties like megaplex cinemas, indoor golf complexes, and water parks tend to suffer during recessions. However, EPR leases its properties to tenants on long-term (10-year-plus) triple-net leases, generally with rent increases built in over time. This means that not only do the tenants continue paying the leases during good times and bad, but they are also responsible for the variable costs of property ownership, such as property taxes, insurance, and maintenance. On average, just 3.5% of EPR's leases expire per year, which minimizes vacancy and turnover risk.
Additionally, the education property portfolio serves as a nice hedge against tough times, as people need education regardless of what the economy is doing. Public charter schools remain a huge growth opportunity. Since 2000, the number of public charter schools in the U.S. has grown by 11% annually and the number of students enrolled in charter schools has grown at an even faster 15% rate. This has created big waiting lists, which currently have more than 1 million students on them.
The stats on charter schools point to a big growth opportunity for EPR. Image source: EPR Properties.
In short, the education portion of the portfolio should grow nicely, even if the economy goes bad, which should help lessen the effects of a recession on the overall portfolio and keep those dividends growing.
Low debt and low overhead
If you live anywhere near a major metropolitan area, there's a good chance that you're familiar with Public Storage's big orange storage facilities. What you may not know is that Public Storage is one of the biggest REITs in the world, and has a low-debt, low-overhead business model that dividend investors should love.
Public Storage owns about 2,600 properties with a total of nearly 190 million square feet of space. It is the largest player in the U.S. self-storage market by a large margin, and is the most recognizable brand in the industry -- especially in its metropolitan markets.
To be perfectly clear, there are some downsides to the self-storage business. In particular, since most self-storage units are rented on a month-to-month basis, it's fairly easy for tenants to leave if they need to cut expenses (say, during a recession). The self-storage business has experienced five consecutive years of growth, and the main reason is because the economy is doing well.
However, while vacancies may spike during a recession, long-term investors need not worry. Public Storage has previously said that it could break even with occupancy of just 30% of its units, and the company currently operates at more than 95% occupancy. Plus, with an extremely low corporate debt load, Public Storage doesn't need to worry too much about its interest expense. The company's dividend made up less than 80% of its funds from opreations for the last quarter, so the company could absorb a pretty big earnings hit before it would be forced to slash its payout.
Over the past decade, Public Storage has increased its dividend at an annualized rate of 13% per share, including an 11% hike in 2016. What's more, the company has produced annualized total returns of about 17% during that time. While there's no guarantee this performance will continue, I see no reason to believe Public Storage won't produce market-beating performance for another decade and beyond.
Invest for the long haul
As a final thought, it's important to mention that I don't consider either of these to be low-risk investments over short periods of time. For instance, I wouldn't put money that I'm going to need in a year into these.
Both have considerable risk factors. I already mentioned that since Public Storage's tenants are on short-term leases, there is more potential for high vacancy rates if the economy goes sour. Additionally, some risks have nothing to do with the businesses -- for example, if interest rates spike, it generally translates into lower share prices for REITs. In fact, that's the primary reason both stocks declined in the latter half of 2016 while the market was reaching record highs.
The bottom line is that both companies have great business models and do a great job of mitigating long-term risk, so invest with that in mind. It's entirely possible these stocks will decline over the next week, month, or year, but if you hold on for the long haul, these could both deliver impressive returns.
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