Manufactured home communities tend to get a bad rap. Many people see them as undesirable places to live, preferring instead to spend a lot more to rent an apartment or buy a single-family home than live in these more affordable communities. Likewise, real estate investors tend to shy away from these properties, favoring more aesthetically appealing places, like shiny office towers or luxury apartment buildings.

That’s opened the door for Equity LifeStyle Properties (ELS) to carve out a nice niche by focusing on these and other property types off the beaten path of other investors. This strategy has really paid dividends for the company’s investors over the years. Despite that, it remains a relatively unknown stock. Here’s why this hidden gem is a great dividend stock to buy for those with around $500 available to invest right now.

Getting to know Equity LifeStyle Properties
Equity LifeStyle Properties is one of only three publicly traded real estate investment trusts (REITs) out of the more than 190 in the sector focused on manufactured home (MH) communities. The residential REIT also owns recreational vehicle (RV) parks, campgrounds, and marinas. It currently owns over 450 of these properties across 35 states and one Canadian province, with nearly 172,500 sites.

The company focuses on owning high-quality properties located in retirement or vacation destinations. More than 110 properties have lake, river, or ocean frontage, and 120 are within 10 miles of the U.S. coastline. Meanwhile, over 70% of its MH communities are either age-qualified or have an average resident age of 55+.

The company has a pretty simple business model. It owns the land and leases the developed sites to owners of manufactured homes, vacation cottages, RVs, and boats. Demand for space in its MH communities tends to be very stable (it’s expensive to move one of these homes). Because of that, occupancy remains high, and it can consistently increase its rental rates, even during a recession.

Meanwhile, demand for space in its RV parks and marinas is growing, driven by demographics and an overall desire by consumers to enjoy more outdoor experiences. These factors have helped drive above-average same-store net operating income growth for its portfolio over the long term (4.4% since 1998 compared to 3.3% for the average REIT).

A track record of growing shareholder value
Equity LifeStyle has flown under the radar of most investors over the years, even though it has been a wealth-creating machine. The REIT has delivered an impressive total return of more than 7,230% since its initial public offering (14.6% annualized). That has significantly outpaced the S&P 500’s total return during that period (10.5% annualized). Its performance over the last 10 years (14.7% annualized) puts it in the 90th percentile in the REIT sector.

The REIT also has an excellent record of growing its dividend. Since 2006, it has delivered 21% compound annual dividend growth. Equity LifeStyle’s payout currently yields around 2.7%, more than double the dividend yield on the S&P 500 (recently around 1.3%). At that rate, a $500 investment would produce about $13.50 in annual dividend income compared to $6.50 for a similar investment in an S&P 500 index fund.

More growth ahead
Equity LifeStyle should be able to continue growing shareholder value in the future. MH fundamentals remain strong. Supplies continue to be constrained while demand is healthy since it’s a much more affordable option than other living situations. Meanwhile, demand for RV sites and marina slips is growing. These catalysts should continue growing its same-store net operating income at a healthy pace.

Equity LifeStyle also has a healthy financial profile. That gives it the flexibility to invest in its existing communities by adding amenities and expanding sites to drive rent growth. In addition, it has a strong balance sheet, giving it the capacity to acquire new properties as high-quality opportunities emerge. The REIT’s multiple growth drivers should grow its cash flow, allowing it to continue increasing its dividend.

A hidden gem
Equity LifeStyle Properties has done a fantastic job growing shareholder value over the years. The REIT’s focus on niche property types has paid big dividends. MH communities, RV parks, and marinas benefit from low supply and strong demand, which should enable them to continue producing growing income streams for the REIT. Add in its ability to make growth-related investments, and it should be able to continue paying a rising dividend.

— Matt DiLallo

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Source: The Motley Fool