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These 3 Beaten-Down Stocks Just Keep Raising Their Dividends. Time to Buy?

The Motley Fool logo The Motley Fool 2/4/2023 Matthew DiLallo, Brent Nyitray, CFA, and Marc Rapport
These 3 Beaten-Down Stocks Just Keep Raising Their Dividends. Time to Buy? © Provided by The Motley Fool These 3 Beaten-Down Stocks Just Keep Raising Their Dividends. Time to Buy?

Many stocks remain well off their peaks from 2021 and early 2022, beaten down by the current bear market. But it's not all bad news for the market, especially for those who like to collect dividend income. Lower share prices are increasing dividend yields, and many of these dividend payers are solid companies that are earning enough to keep boosting those dividends even in this uncertain economy.

Three dividend stocks that continue to increase their payouts despite lowered share prices are Life Storage (NYSE: LSI), Realty Income (NYSE: O), and Digital Realty Trust (NYSE: DLR). That has caught the attention of these Motley Fool contributors, who consider the decline an opportunity to buy in on these three companies at a discount.  

Life Storage stock has dipped, but its dividends keep growing

Marc Rapport (Life Storage): As long as people have more stuff than space, businesses that can successfully bring scale to self-storage should do just fine. That's certainly the case with Life Storage, one of the storage industry's largest operations with a portfolio of more than 1,100 locations in 37 states and the District of Columbia.

Like its competitors, Life Storage benefits from steady demand and the ability to quickly adjust rents because the leases tend to be month to month. This self-storage real estate investment trust (REIT) also has four specific strategies that should help it keep growing.

The first strategy is its third-party management program. That's a reason you see Life Storage-branded properties in so many shapes and sizes. It's a great way to spread brand awareness while generating income without ownership. The other three strategies are joint ventures that let it leverage its own resources with investing partners, its Warehouse Anywhere program for e-commerce vendors, and its use of touchless self-service rentals that now account for nearly 40% of its rental income.

Analysts who follow this dividend stock give it a consensus price target of $128, which would be a nice jump from its current price of about $107. It's also yielding an attractive 4.4% after the company has raised its dividend at an annualized rate of 16% for the past three years. That includes a jump from $1.08 a share per quarter to $1.20 just in January.

Life Storage stock has rallied some of late, jumping about 8% so far this year, but is still down about 21% year over year. That helps underline this attractive buying opportunity.

Realty Income is a good stock for a recession 

Brent Nyitray (Realty Income): Realty Income specializes in single-tenant properties with an unusual lease structure. Most typical leases are gross leases, which require the tenant to cover rent and little else. Realty Income uses a triple-net lease structure, which requires the tenant to cover rent, taxes, maintenance, and insurance. These leases generally last 10 years or more, contain automatic escalators, and are extremely expensive to break. So Realty Income must analyze its potential tenants carefully to ensure they are able to stay in business over an entire economic cycle. 

That means Realty Income looks for businesses in highly recession-resistant sectors. During the height of the pandemic, most of its tenants were considered essential businesses and permitted to remain open. During 2020, when most REITs were cutting their dividends, Realty Income hiked its monthly payout consistently (the REIT has over 100 consecutive quarters of dividend increases). If the U.S. enters a recession this year, investors will probably flock to defensive stocks like Realty Income, as well as consumer nondiscretionary stocks like Procter & Gamble.

The REIT has guided for 2022 funds from operations (FFO) to come in between $3.99 and $4.07 per share. At current share-price levels, that puts Realty Income on a price-to-FFO ratio of 16.8 times, which is about right for a leading REIT.

Realty Income stock saw a 25% drop in price between mid-August and mid-October over concerns about whether the REIT could manage the accelerated interest rate increases going on at the time, but it has weathered that headwind and the stock has somewhat recovered (although it's still down about 2% over the past year). It has a dividend yield of 4.4% as well and should be considered a core holding for income investors.

Down, but not out of power to continue growing

Matt DiLallo (Digital Realty): Digital Realty has an exceptional track record of paying dividends. The data center REIT increased its payout by 5% early last year, marking its 17th straight year of annual dividend growth. That kept the company in a select group of REITs that have increased their payouts every year since their initial public offerings. 

Despite that leading track record, Digital Realty's stock has gotten the stuffing beaten out of it since the market peaked early last year, and it has lost more than a third of its value. That slump came even though demand for data center capacity remains strong. It delivered record quarterly bookings in its most recent quarter, the third record in the last four quarters. 

The sell-off in Digital Realty's share price pushed its dividend yield up to 4.3%. That's more than double the yield of the S&P 500. That payout makes it look like an attractive buy these days since it should be able to continue growing.

The company has a large and growing pipeline of data centers under development. It has already pre-leased 60% of this capacity, reducing its risk and providing visibility into future revenue growth.

The REIT has an excellent track record of making value-enhancing acquisitions. It recently bought a majority stake in Teraco, a leading South African data center provider. With a strong investment-grade balance sheet, Digital Realty has the financial flexibility to continue expanding its portfolio and growing its dividend. 

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Brent Nyitray, CFA has no position in any of the stocks mentioned. Marc Rapport has positions in Digital Realty Trust, Life Storage, and Realty Income. Matthew DiLallo has positions in Digital Realty Trust and Realty Income. The Motley Fool has positions in and recommends Digital Realty Trust. The Motley Fool recommends Life Storage. The Motley Fool has a disclosure policy.

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