Dividend growth is notable for the historical performance of companies that increase their payouts. Dividend producers and initiators have produced an average annual return of 10.7% over the past 50 years, according to data from Ned Davis Research and Hartford Funds. This outperformed companies with no changes in their dividend policy (average annual total return of 7.1%) and the equal-weighted return of S&P 500 (8,2%).
Here's a look at their dividends and whether these companies can continue to increase their payouts in the future.
Back to steady growth
AvalonBay Communities recently declared its first-quarter dividend. It's paying $1.65 per share, $3.81 more than its previous dividend payment. This is the flat REIT's first dividend increase since the start of the pandemic:
AVB splitting Y-chart data
As the chart shows, AvalonBay had previously been a dividend-generating stock. However, the company stopped increasing its payout in early 2020 due to the pandemic's impact on apartment demand in high-cost coastal markets. This put pressure on the REIT's occupancy, rents, and funds from operations (FFO) levels.
Demand for apartments in major cities has begun to recover. Last year, AvalonBay reported a $13.21 trillion increase in same-store net operating income (NOI), driven by double-digit rental revenue growth and strong occupancy levels. This helped drive an $18.51 trillion jump in core FFO to $1.41 trillion, or $9.79 trillion per share.
The REIT expects continued growth in 2023. Core FFO is expected to increase approximately 5% to $10.31 per share, driven by continued same-store NOI growth and the impact of development projects. This will give the company plenty of cash to cover its higher annual dividend expense of $6.60 per share.
Given this conservative payout ratio, AvalonBay has room to increase its dividend. Furthermore, it currently has 17 development communities under construction that should provide incremental NOI as they stabilize. Add in the prospect of continued same-store NOI growth with rising rents, and AvalonBay should be able to continue increasing its dividend going forward.
a big push
Public storage is making up for lost time. The leading self-storage REIT recently declared its latest dividend at $ 3.00 per share, 50% higher than its previous payment. This marked the company's first dividend increase since 2016.
Public Storage chose to maintain its payout constant to maintain more cash and maintain a high-risk balance sheet while executing its growth strategy. The REIT has spent $1.4 billion on acquisitions, developments, projects, and renovations since the beginning of 2019. These investments have expanded its portfolio by $2.6 billion.
These investments and above-average same-store NOI growth helped drive a significant increase in FFO. Public Storage's core FFO per share jumped from $25.31 in the first nine months of last year to $11.77 per share. This is plenty of cash to cover the redefined dividend, which would have cost $11.00 per share.
Even with these investments, the REIT has maintained a strong balance sheet, giving it room to continue expanding. It recently offered to acquire other self-storage REITs. preservation of life in a $11 billion deal to boost its growth prospects. It would also improve its ability to maintain free cash flow after paying the dividend to fund future growth-related investments.
With a strong balance sheet and a prudent payout ratio, even at the accelerated rate, Public Storage has the flexibility to continue increasing its dividend. Meanwhile, its FFO is expected to continue to increase as it uses its balance sheet capacity to make acquisitions and invest in development and redevelopment projects.
The power to produce higher returns
Historically, companies that increase their dividends produce higher returns than those that maintain their static payouts. As a result, investors won't want to miss out on the recent dividend increases issued by AvalonBay Communities and Public Storage. While there's no guarantee they'll outperform from here, both companies have the capacity and growth prospects to continue increasing their payouts. This makes them much more attractive to investors seeking above-average total returns.
Matteo Di Lallo holds positions at AvalonBay Communities and Life Storage. The Motley Fool recommends AvalonBay Communities and Life Storage. The Motley Fool has a disclosure policy.
