Sorry, I went off the grid again. Last month, I started taking a post-secondary accounting course at BCIT, which is already enhancing my financial statement reading skills. I’ve been primarily focused on juggling the course and my jobs (mostly writing for Motley Fool Canada and Sure Dividend). And I’ve been enjoying every moment of it! …except I feel bad for not updating this dividend stock focused blog.
So, thank you for your readership! You’re in for a treat! You should consider buying STORE Capital Corp. (NYSE:STOR) for income. It’s a quality net-lease real estate investment trust (REIT) that has pulled back recently, making it reasonably priced for buying again.
Quality REIT for Dividend Income
We like the quality REIT that generates steady and growing rental income. Warren Buffett likes STORE Capital, too! Berkshire Hathaway (BRK.A)(BRK.B) owns close to $760 million worth of common stock.
STORE Capital is a net-lease REIT, which means it gets to pass on a lot of costs to its tenants. In its latest/Q3 2021 fact sheet:
We are one of the largest and fastest-growing net-lease REITs and own a large, well-diversified portfolio that consists of investments in 2,788 property locations, or $10.3 billion in gross investment dollars, as of September 30, 2021. We estimate the market for STORE Properties to approximate $3.9 trillion in market size and to include more than 2 million properties.
So, STOR has less than 0.3% of gross investments in its target market and there is a lot of room for STOR to fill the need of this market.
STOR has a weighted average remaining lease contract term of about 13 years and an occupancy of roughly 99.4%. It maintained high occupancy even throughout the pandemic with its diversified portfolio spread across 49 U.S. states and 119 industries. Its top tenants represent about 19% of its base rent.
STORE Capital’s business model drives internal growth of about 5% through lease escalations, reinvested cash flows, and reinvestment of property sale proceeds. These internal growth drivers and its sustainable payout ratio makes a safely-growing dividend.
STOR’s five-year dividend growth rate is approximately 5.8%. The REIT will be reporting its Q4 and full-year 2021 results on February 23. Its payout ratio is estimated to be sustainable at about 75% this year. At writing, STOR yields 5.05%.
It’s a decent valuation to start accumulating shares.
The analyst consensus suggests STOR is undervalued by 18% and has 12-month upside potential of 22% based on the price target of $37.35. Including the dividend, this implies total returns potential of about 27% over the next 12 months.
Technically, the selloff may not be over yet. So, investors may want to consider starting their research and easing in here.
In summary, STORE Capital provides a juicy and growing dividend starting with today’s yield of about 5%. The net-lease REIT is in a good position, as it gets to pass costs to its tenants. It also has internally inflation escalations of 1.8% on most of its portfolio. Throwing in its huge addressable market, it can be selective on the real estate properties it accepts into its portfolio and has a long growth runway. STOR will likely be able to grow its dividend by at least 5% annually. So, it’s a nice income stock with stable growth potential.
Canadian investors can consider holding STOR shares in their RRSP/RRIF to avoid the 15% foreign withholding tax on its dividend.
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Disclosure: As of writing, we own shares of STOR.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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