VICI - REIT Dividends: The Gift That Keeps On Giving
2023-11-27 07:00:00 ET
Summary
- I plan to give my children shares in real estate investment trusts as a Christmas gift to jump-start generational wealth.
- I recommend Realty Income, American Tower, Agree Realty, VICI Properties, MidAmerica, and Prologis Inc. as high-quality REITs.
- REITs are attractive because they must pay out at least 90% of taxable income in dividends, providing a steady income stream.
This year I’m giving my children a “gift that keeps on giving.”
Unlike toys, candy, clothes, or perfume, my wife and I decided that we would celebrate Christmas with a gift that could be enjoyed for decades.
Keep in mind, my kids are older now and they don’t care for toys or bicycles.
My oldest girls are married, and they prefer gift cards at shops like The Home Depot ( HD ), Lululemon ( LULU ), or privately held Hobby Lobby.
My younger girls are gainfully employed, and they both attend school, so they prefer clothes and cash.
When I was a young child, my Uncle Lee bought me shares in Consolidated Edison ( ED ) that have returned around 4500% since it was gifted to me.
I don’t own ED shares today…
However, if I did, I would be rich, as $1.80 (purchase price) has ballooned to over $90.00 today.
Uncle Lee knew about the power of dividends. I’m sure that he recognized that Consolidated Edison would manage its capital wisely to reinvest in its business and to reward shareholders with steady dividends.
It was not until I was in college that I grasped the importance of dividends.
One of my professors, Dr. Arnold, was around 70 years old and he taught the class the concept of dividend policy.
He cited a study by Harvard Professor, Michael Jensen, who authored a white paper titled Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.
In the article, Professor Jensen described the free cash flow hypothesis in which a company with too much free cash flow would result in internal insufficiency and a waste of corporate resources, thus leading to agency costs as a burden of stockholder wealth.
“Payouts to shareholders reduce the resources under manager’s control, thereby reducing managers’ power and making it more likely they will incur the monitoring of the capital markets which occurs when the firm must obtain new capital.
Jensen’s free cash flow hypothesis describes that when a company has generated an excessive surplus of cash flow and there are no profitable investments, management tends to abuse the free cash flow.
“Managers with substantial free cash flow can increase dividends or repurchase stock and thereby pay out current cash that would otherwise be invested in low-return projects or wasted.
This leaves managers with control over the use of future free cash flows, but they can promise to pay out future cash flows by announcing a "permanent" increase in the dividend.
Such promises are weak because dividends can be reduced in the future. The fact that capital markets punish dividend cuts with large stock price reductions is consistent with the agency of free cash flow.”
I can hear Benjamin Graham (the author of The Intelligent Investor ) talking now,
“Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the manager’s hands before they squander it or squirrel it away.”
At the end of the day, dividends are all about capital markets discipline…
A REIT For My 5 Children
As I said earlier, I plan to buy each of my children's (and grandson's) shares in a real estate investment trust ("REIT") for Christmas.
Keep in mind, unlike ordinary C-Corporations, REITs must pay out at least 90% of their taxable income in dividends to shareholders, which, of course, is one of the primary attributes (for REITs).
And just like my Uncle Lee, I want to assist my kids in jump-starting generational wealth by purchasing shares in some of the highest-quality REITs that will grow over time.
#1: Realty Income Corporation ( O )
Realty Income’s quality score (as per our proprietary software) is 97. That’s because of the:
- exceptional earnings history - positive earnings growth in 26 of 27 years
- exceptional dividend history - 29 consecutive years of rising dividends.
- fortress balance sheet : A rated by S&P and Moody’s,
- conservative payout ratio (of 76% based on adjusted funds from operations, or AFFO, and
- highly diversified business model of over 13,000 properties (in the U.S. and Europe).
As seen above, Realty Income has consensus growth in 2024 of 4%, and based upon the latest announcements – Spirit Realty ( SRC ) merger and data center investments – the "monthly dividend company" is likely to sustain its growth trajectory.
Shares are now trading at $53.91, with a P/AFFO multiple of 13.5x. The dividend yield is 5.7%, which positions new investors for plenty of upside. This translates into a 25%+ annualized total return target (based on the FAST Graphs below).
#2: American Tower Corporation ( AMT )
American Tower’s quality score (as per our rankings) is 90, and that’s because of the:
- solid earnings history – AFFO per share CAGR of 12.4% over the last decade,
- solid ROIC despite site count growth of over 4x since 2012,
- the tower business model that demonstrates significant operating leverage as tenancy increases (2 tenants: 13%, 3 tenants: 24%),
- solid balance sheet : BBB- rated by S&P, conservative payout ratio (of 69% based on AFFO), and
- highly diversified global portfolio of nearly 225,000 communications sites.
As seen above, American Tower has consensus growth in 2024 of 6% and 8% in 2025.
AMT shares have grown by over 22% in the last 30 days (see my last article here ) and are now trading at $199.32 with a P/AFFO multiple of 20.4x. The dividend yield is now 3.2%, and we see more upside based on our projected annualized total return target of 20%.
(We prefer AMT to REIT peer Crown Castle ( CCI ), based on CCI’s muted growth prospects of -8% in 2024 and elevated payout ratio of 90% (based on 2024 estimates).
#3: Agree Realty Corporation ( ADC )
Agree Realty’s quality score (as per our rankings) is 96, and that’s because of the:
- solid growth engine powered by $8.5 billion of net lease investments since 2010,
- best-in-class tenants: 69% investment grade and 11.6% (of ABR) invested in ground leases,
- solid dividend history: 140 consecutive dividends paid,
- solid balance sheet : BBB rated and conservative payout ratio (of 76% based on AFFO), and diversified portfolio of around 2,100 properties.
As seen above, Agree has consensus growth in 2024 of 4%.
Shares are now trading at $57.82 with a P/AFFO of 14.7x. The dividend yield is now 5.1%. We see more upside based on our projected annualized total return target of 25%.
#4: VICI Properties Inc. ( VICI )
VICI’s quality score (as per our rankings) is 90, and that’s because the
- exceptional growth history – announced ~$35 billion of domestic and international investments across gaming and non-gaming experiential assets since formation (in 2007),
- achieved investment grade ratings and S&P 500 (SP500) inclusion in record time (4 years since the IPO),
- strong dividend history; raised ( the dividend ) every year while targeting a 75% AFFO payout ratio,
- compound dividend growth of 7.6% per year since listing,
- investment grade unsecured borrower broadens access across capital markets (BBB- rated),
- owns 6 Casinos within & alongside the “Sports Triangle” formed by Allegiant Stadium, T-Mobile Arena, and the Proposed Athletics Stadium in Las Vegas.
As seen above, American Tower has consensus growth in 2024 of 5% and 4% in 2025.
VICI shares are now trading at $28.66 with a P/AFFO multiple of 13.5x. The dividend yield is now 5.8%, and we see more upside based on our projected annualized total return target of 20%.
#5: Mid-America Apartment Communities, Inc. ( MAA )
MAA’s quality score (as per our rankings) is 99, and that’s because of the:
- consistent and compounding FFO growth through market cycles: 9/7% CAGR over 10 years,
- strong dividend track record; steady growth (never suspended or reduced the dividend),
- safe payout ratio of 68% (based on AFFO per share),
- fortress balance sheet - one of 8 REITs to be A- rated or above,
- highly diversified business model: 276 communities and 95,000 units.
As seen above, MidAmerica has consensus growth in 2024 of 2% and 4% in 2025.
MAA shares are now trading at $122.67 with a P/AFFO multiple of 15.0x. The dividend yield is now 4.6% and we see more upside based on our projected annualized total return target of 25%.
#6: Prologis, Inc. ( PLD )
PLD’s quality score (as per our rankings) is 99, and that’s because of the:
- leading Core FFO CAGR for 3 and 5-year time periods,
- leading dividend CAGR for 3 and 5-year time periods,
- $1 billion of Free Cash Flow after dividends in 2022,
- global portfolio with a focus on high-barrier, high-growth markets (6700 customers with 1.2 billion SF on 4 continents,
- fortress balance sheet with A3/A credit ratings.
As seen above, PLD has projected consensus growth in 2024 of -% and 8% in 2025.
PLD shares are now trading at $112.00 with a P/AFFO multiple of 24.3x. The dividend yield is now 3.1%, and we see more upside based on our projected annualized total return target of 17%.
In Closing…
One of the great things about REITs is that there’s not much temptation for C-suite managers to “squander” away free cash flow because these companies MUST pay out at least 90% of taxable income in the form of dividends (most payout 100%).
Hopefully, my children will look at me like I did when Uncle Lee gifted me those shares in ED.
Given the attractive quality scores for each of these REITs (listed in this article) and the potential for outsized price appreciation, there’s a very good chance that this gift will be one of the best gifts that keep on giving.
I’ll close out my holiday-inspired writeup with this famous quote from one of the wealthiest investors of all time, John D. Rockefeller:
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."
Happy Holidays!
For further details see:
REIT Dividends: The Gift That Keeps On Giving