I’ve been using the dividend growth investing strategy for more than a decade. And it’s treated me exceptionally well. So well, in fact, it allowed me to retire in my early 30s.
The dividend income my dividend growth stock portfolio produces for me is enough to cover my bills.
Better yet, this income continues to increase, like clockwork, all by itself due to dividend raises. I’m a proud dividend growth investor.
But you know who else is arguably a dividend growth investor? Warren Buffett. That’s right.
The legendary billionaire investor – arguably the greatest investor of all time – almost exclusively buys high-quality dividend growth stocks. And there’s one stock that both of us like a lot.
Today, I want to tell you about a Buffett-approved high-yield dividend growth stock that I recently bought. Ready? Let’s dig in.
Warren Buffett oversees a $295 billion common stock portfolio for his conglomerate, Berkshire Hathaway. There are 44 different stocks in that portfolio. And only one of those stocks is a real estate investment trust.
That’s right. There’s only one Buffett-approved REIT in the world.
So of all of the REITs out there, there’s only one that Berkshire Hathaway likes enough to own. I think that speaks volumes about this company’s appeal. I’ve gotta say, I see the appeal myself. So much so, in fact, that I recently added to my position in this REIT.
The stock I recently bought is Store Capital (STOR).
This is one of my favorite REITs. First, let’s talk about what a REIT is. A REIT is a real estate investment trust. For equity REITs, that means you’re basically buying into a company that owns and manages physical real estate. In the case of Store Capital, they acquire and manage single tenant real estate buildings, triple net leasing them out over long periods of time to high-grade tenants.
These tenants run the gamut of business models.
One of their top tenants is Bass Pro Shops, which is an outdoor gear retailer. Another top tenant is Zips Holdings, one of the largest car wash operators in the US. Yet another top tenant is Cadence Education, which is one of the premier early childhood educators in the United States. It’s a highly diversified tenant base, which I love. No one tenant accounts for more than 3% of base rent and interest. This reduces tenant risk. Plus, Store Capital has their tenants commit to very long leases – typically 15-20 years. This reduces vacancy risk.
This REIT has grown at a healthy rate since going public in 2014.
Revenue has more than doubled since 2015. AFFO/share came in at $1.49 for FY 2015. They’re guiding for nearly $2.00 in AFFO/share for this year. So we’re talking a CAGR of 4.68% for AFFO/share. Store Capital is set up for approximately 5% annual bottom-line growth internally, before even getting into accretive acquisitions. It’s not a high-flying tech company or anything like that, but these are very good numbers for a REIT. And the future looks bright. They’re almost guaranteed to grow, as their leases have rent escalations built right in.
If you think this real estate portfolio has been troubled by the pandemic, you’d be thinking wrong.
Portfolio occupancy is at 99.6%, as of June 30, 2021. That’s just barely off of the 99.7% portfolio occupancy as of June 30, 2019 – before the pandemic. We’re splitting hairs here. As you can see, it’s a highly occupied portfolio of real estate leased out to a variety of tenants across a broad range of industries.
Store Capital’s property portfolio consists of over 2,700 properties across 49 different states.
I love it. When you buy Store Capital shares, it’s like you’re instantly becoming a scaled-up commercial real estate landlord – without doing any of the hard work. You immediately access the cash flow from over 2,700 commercial properties across the US. It’s a stream of cash flow that flows from the tenants to Store Capital, then to Store Capital investors through the large, growing dividend that Store Capital pays to its shareholders.
How large? The stock yields 4.7% right now.
That’s more than three times higher than what the broader market yields. It’s also 40 basis points higher than the stock’s own five-year average yield. But it’s not just yield we’re talking about here. Store Capital has increased its dividend for seven consecutive years, with their most recent dividend increase of 6.9% having been announced in mid-September. Their five-year DGR is 9.8%. Gotta love a 4.7% yield and high-single-digit dividend growth.
This big dividend remains protected by healthy operational cash flow.
Store Capital actually increased its cash flow guidance for this fiscal year with Q2 results. They upped their adjusted funds from operations per share guidance to between $1.94 and $1.97. The high end of that guidance pins them back to what they were doing before the pandemic, and it easily covers the quarterly dividend of 38.5 cents per share.
Despite the business recovering, the stock hasn’t at all.
Yep, they’re producing pre-pandemic cash flow at the business level. But the stock isn’t even close to where it was before. This was a $40 stock in early 2020, before the pandemic hit. It’s now in the $33 range. That’s a pretty significant drop in the stock’s price. And since the cash flow has rebounded, it’s also a pretty significant drop in the valuation.
I see that short-term volatility as a long-term opportunity.
This high-yield, Buffett-approved dividend growth stock isn’t getting the love it should from the market. But I’m showing it some love – and some capital. I recently added to my position with a small tranche of shares. This tranche was picked up at a cost basis of $32.76/share, which I alerted my Patrons about in real-time over at Patreon. Now, I also added to my Store position during the the pandemic-induced crash, and I was able to pick up shares in Store Capital for around $15/each last spring. Even though the stock is up by more than 100% since then, I still see it as attractively valued. It’s just not the extreme deal it was before.
In my view, this stock is attractively valued.
Based on the midpoint of that aforementioned guidance, the forward P/AFFO ratio is 16.8. A lot of other high-quality eREITs are closer to 20 right now. And this is a stock that’s offered an average yield of 4.3% over the last five years. You’re getting a yield of 4.7% on it right now. That’s in a broader market that arguably looks stretched and offers a yield of well below 1.5%. Relative to a lot of other ideas in this market, Store Capital looks like a deal.
But don’t take just my word for it.
Buying this stock means you’re investing alongside Warren Buffett. Berkshire Hathaway owns over 24.4 million shares of Store Capital, worth more than $800 million at today’s price. In fact, Berkshire Hathaway bought shares in Store Capital during Q2 2020, back when they were actually busy selling a lot of other stocks. It’s one of the few stocks they bought during the swoon. Now, my position in Store Capital isn’t anywhere near as large as Berkshire Hathaway’s. Not even in the same universe, actually. But that’s not the point. Investing can always be scaled up or down, depending on one’s means and needs. Whether you own 1 share or 1 million shares, you still own a slice of a business.
Store Capital might just be the REIT your portfolio needs right now.
If you’re looking for a high-yield, attractively valued dividend growth stock to buy in this arguably stretched stock market, take a good look at Store Capital. Buffett’s firm has taken a look and bought it. So have I. You might want to consider doing the same.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
My #1 fund for a rock-steady 7% dividend in 2022... paid monthly! [sponsor]It's the brainchild of one of the smartest investment managers alive and it pays you every single month. Even better, this fund trades at a discount to NAV, so there's near-certain price gains ahead! All the details are waiting for you, along with 2 other incredible picks from my full "7% Monthly Payer Portfolio."