Here’s Why I’ve Been Buying This Dividend Aristocrat

The S&P 500 is now well into a bear market. Unless you’re selling off stocks in retirement, that’s great news. After all, almost everyone watching this video is still accumulating shares in businesses.

And it’s advantageous to pay less, not more, for those shares. Now, I’m a dividend growth investor. So that means I’m accumulating high-quality dividend growth stocks.

These stocks represent represent equity in world-class businesses that pay reliable, rising dividends. The dividend growth investing strategy is super comforting during times like now.

See, it focuses you on the safe, growing dividend income your holdings produce for you. Stock prices are extremely volatile. But dividends just aren’t.

And when dividends do move, it tends to only be in one direction – up. That’s especially so for Dividend Aristocrats. These are the crème de la crème of dividend growth stocks. A Dividend Aristocrat has increased its dividend for at least the last 25 consecutive years.

When you’re relying on your dividends to pay your bills, not what you can sell your stocks for, the stock market’s volatility doesn’t matter very much.

Instead, you’re more concerned about business operations and the continued flowing and growing of those dividend payments from business to shareholder.

Well, one Dividend Aristocrat, in particular, looks very compelling right now. In fact, I find it so compelling that I’ve personally been picking up shares.

Today, I want to tell you about the Dividend Aristocrat that I’ve recently been adding to in my FIRE Fund. Ready? Let’s dig in.

So which Dividend Aristocrat have I been buying? It’s Essex Property Trust (ESS).

Essex Property Trust is a real estate investment trust that owns and manages apartment communities.

There are quite a few things I really like about Essex Property Trust. And there’s very little I dislike. One thing that’s easy to like about it? The very business model.

We’re talking about shelter here. It’s a basic need.

When thinking about commercial real estate and all of the potential REITs out there you can buy, a lot of real estate can be somewhat discretionary in nature. Shopping malls would be an example. Office buildings would be another. These aren’t completely and totally necessary to everyday life. But shelter? That’s not discretionary. It’s a necessity. And Essex Property Trust caters to that… and profits from it. Essex Property Trust then combines that necessity with a unique geographic advantage.

This REIT is concentrated along the West Coast of the United States.

They own 253 apartment communities, representing approximately 62,000 apartment homes. These are primarily located in California, although they also have some small exposure to the Seattle, Washington area. So what’s so great about the West Coast? Well, here’s the thing.

There are barriers to entry here that simply don’t exist in other markets.

Between regulatory hurdles to get new supply to market along with the natural terrain that limits where supply can go, the entrenched player that is Essex Property Trust naturally benefits from the favorable supply/demand dynamics. Occupancy remains high, at approximately 96%. And rising interest rates will do the idea of funding new supply no favors, making the existing supply that much more valuable.

I know it’s easy to bash California, but we have to remember it’s still the king of America in terms of population and GDP.

If you own an apartment community, you want to be located where there are plenty of high-income consumers ready and willing to pay high rents. Well, California has that in spades. I mean, one of the reasons people complain about California is that the rent is too high and it keeps going up, along with the fact that house prices are astronomical. Who do you think benefits from high rents in California? Who do you think benefits from rising rents in California?

And who benefits from extremely high house prices in California, which keeps people in apartments? Essex Property Trust, of course. Are some people forced to leave the state because of this? For sure. Not everyone can afford to live in California.  But when I hear people say that nobody wants to live in California because of sky-high rents, I shake my head.

It’s like that old Yogi Berra saying: “Nobody goes there anymore. It’s too crowded.”

I’ll give you an easy comparison. My resident state is Florida. I moved there in 2009, before it became so popular to do so. However, as popular as Florida has recently been, California’s population of nearly 40 million, which is the highest of any US state, is almost twice as high as Florida’s population. And California’s annual GDP is more than twice as high as that of Florida’s.

If California were an independent nation, it would have the world’s 5th highest annual GDP all on its own. California a terrific market for a REIT like Essex Property Trust. It all comes down to supply and demand. Demand to live in California is high. Supply has a tough time meeting that demand, which isn’t getting easier. And so prices go up. Meanwhile, per capita income in California routinely ranks in the top five for all US states. It’s a market advantage.

And this market advantage is a big reason why the company has done so well, for so long.

They combine a basic need with a market advantage. That’s a powerful one-two punch. And here’s what’s happened. The REITs revenue has nearly tripled over the last decade, up from $543 million in FY 2012 to $1.4 billion in FY 2021. That’s a compound annual growth rate of 11.5%. Funds from operations per share have advanced from $6.71 to $13.98 over that 10-year period, which is a CAGR of 8.5%. This very solid business growth has, of course, led to very solid dividend growth.

Essex Property Trust has increased its dividend for 28 consecutive years. 

This is another thing I like about Essex Property Trust. It’s one of the few REITs that is a Dividend Aristocrat. Again, I think that speaks to the value of being in a type of real estate that caters to a basic need. I also think it speaks to the market advantage. And I think it speaks to the quality and durability of the business. The 10-year DGR is 7.2%, which only slightly trails FFO/share growth. That has kept a lid on the payout ratio. Based on midpoint guidance for this year’s FFO/share, the payout ratio is only 63.1%. That’s actually quite low for a REIT. Perhaps best of all here is the yield.

This Dividend Aristocrat offers a very nice yield of 3.4%.

That’s more than twice as high as what the broader market gives you. Furthermore, it’s 50 basis points higher than the stock’s own five-year average yield. Compared to some of the other apartment REITs I track, that yield spread is notable. Most other apartment REITs do not currently present this kind of yield spread. That’s a decent initial indicator of at least some undervaluation. But we can also see other indicators of undervaluation here.

To my eye, this stock looks undervalued.

Here we go with another thing I like about this REIT. Valuation. The P/CF ratio is 16.3. The stock’s own five-year average P/CF ratio is 21.7. That’s a pretty severe disconnect on the cash flow multiple, which would seem to indicate some kind of weakness in the business to warrant the discount. Yet there’s been no weakness in the business. Their most recent quarter – Q1 FY 2022 – showed an increase in the guidance for FFO per share, same-property revenue growth, and same-property net operating income growth. The business is getting stronger, even while the stock is getting weaker. The stock is down nearly 30% this year, and I see that short-term volatility as a long-term opportunity.

I’m buying this Dividend Aristocrat.

Now, the Fund already had an existing position in Essex Property Trust. And that position was initiated a while ago at lower prices than where the stock is currently at. But I like this name so much right here, right now, that I’m averaging up on it and buying more at higher prices than what I originally paid for my shares. I most recently added to the Fund’s position in Essex Property Trust on June 16th for $253.58 per share. And I alerted my Patrons over at Patreon as soon as I made that move.

Could the stock go down from here?

Absolutely. Cheap stocks can get cheaper. There’s no rule against it. But I’m investing in a business for the decades ahead, not buying a stock for what it might do next week. I like the business and its long-term prospects. I like the dividend metrics. And I like the valuation. It looks like a low-priced Dividend Aristocrat to me, which is always going to be interesting to me. If the price goes lower, I’d see that as an opportunity to buy more. All the same, though, I think the price is low enough here to buy. Speaking of the low price, let me point something out.

The stock is priced well below what it was before the pandemic hit. 

That’s right. This was a $330 stock in February 2020. It’s now a $250 stock. This factors out all of the craziness and liquidity that’s been featured in the market over the last two or so years. It’s not just below its pre-pandemic pricing, though. The stock was priced at a similar level to this in the spring of 2015. That’s seven years ago. But let’s focus on the pandemic here. What do we know about what’s happened to rent over the last two years?

We know that rents across the US have been shooting higher.

You can see that bleed down into the REIT’s recent results and increased guidance. The same-property revenue growth doesn’t happen by accident. So rents are higher in 2022 than in 2020. Essex Property Trust is making more money per property and as a whole. And the dividend is almost 13% higher right now than it was heading into 2020.

Yet the stock is almost 25% lower than it was before the pandemic hit. Business and dividend up. Stock down. The business is advantageously positioned for inflation and rising rents in 2022, yet the pricing would have you believe it’s at a disadvantage. The disconnect is another thing I like about this REIT.

Does this Dividend Aristocrat make sense for your portfolio? 

That’s up to you. But my take is that Essex Property Trust caters to a basic need, benefits from unique competitive advantages owed to its core market, offers a market-beating dividend that’s reliably been increased for decades, and looks attractively valued after falling more than 20% from its pre-pandemic pricing despite growing as a business since then. Of course, there are risks here.

No business is a risk-free investment. But it’s hard for me to imagine Essex Property Trust not doing very well over the coming decades. Before I end, I’ll leave you with this little nugget. From Essex Property Trust’s IPO in June 1994 through April 2022, its total return is 5,851% [insert screenshot]. The S&P 500 returned a total of 1,446% over that same time frame. Market-smashing total return? Just one more reason I like this REIT.

— 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.