The thing about life is, it’s not fair.
We all have different abilities, circumstances, challenges, etc.
Everyone has a different starting line in life – some much better than others.
This is one more reason why I love investing.
It’s an equalizer of sorts, allowing even those with modest means to work their way up in life and possibly catch up to (or even surpass) those who started off much more advantageously.
Toward that end, I think dividend growth investing is particularly powerful.
It’s a long-term investment strategy involving the buying and holding of shares in world-class businesses rewarding shareholders with steadily growing cash dividends.
Hundreds of such names can be found on the Dividend Champions, Contenders, and Challengers list – a fantastic resource which has aggregated invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
The power of dividend growth investing is related to many factors, not the least of which is the very nature of what it requires in order for a business to be able to consistently pay and raise cash dividend payments.
In turn, that requires a business to be of a certain level of excellence.
This strategy can allow for very regular people to build significant wealth and passive income… and even financial freedom altogether.
I speak from experience, using this strategy to achieve financial independence and retire in my early 30s.
The strategy guided me as I went about building the FIRE Fund.
That’s my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
While investing in excellent businesses paying growing dividends is a great start, it’s also vital to be mindful of valuation at the time of making any investment.
That’s because price only tells you what you pay, but value tells you what you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Routinely buying undervalued high-quality dividend growth stocks takes advantage of one of the most powerful equalizers in life, allowing one to build significant wealth, passive income, and freedom over time.
Of course, recognizing undervaluation means one has to already understand what valuation is all about in the first place.
That’s where Lesson 11: Valuation comes in.
Written by fellow contributor Dave Van Knapp, it explains what valuation is and how to use simple processes on your own.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Regency Centers Corp. (REG) is an American real estate investment trust that acquires, develops, owns, and operates shopping centers.
Founded in 1963, Regency is now a $14 billion (by market cap) major REIT employing approximately 500 people.
Regency’s portfolio is comprised of nearly 500 properties spread out across more than 25 markets (although Regency has a strong footprint across coastal gateway markets).
Its shopping centers are overwhelmingly (85%+) anchored by grocery stores, creating high occupancy rates (currently near 97%), resiliency, and repeat visits in an e-commerce world.
The REIT has more than 9,000 individual tenants, meaning it’s not overly reliant on any one company’s fate.
Its top tenant is Publix, although it only accounts for around 3% of ABR.
A REIT like Regency has many appealing features for long-term investors.
First of all, real estate has finite supply.
Like the old saying about land goes, they’re not making it anymore.
This built-in scarcity is reinforced by the fact that actually building out physical real estate infrastructure requires massive investments of capital, time, and labor.
Simultaneously, demand is very much not finite.
Technology has advanced rapidly during my lifetime, but people still live in and interact with the physical world.
We live, go to work, store, and shop in physical buildings, leading to built-in demand for real estate.
Furthermore, the world is growing larger and richer, creating even more demand for all of the various purposes of real estate (such as shelter and commerce).
This asymmetrical and advantageous relationship between supply and demand is at the heart of real estate appeal.
Regency has taken this basic premise and run with it, creating a shopping center empire focused on daily needs (such as grocery shopping) which are extra insulated from technological shifts.
This is what positions the REIT for continuous revenue, profit, and dividend growth.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, Regency has increased its dividend for 12 consecutive years.
The 10-year dividend growth rate of 3.8% is pretty mediocre, but it’s the growth acceleration that’s exciting.
The 2024 dividend increase came in at 5.2%, and last year’s dividend raise was 7.1%.
The gravitational shift toward a higher – call it mid-single-digit – dividend growth rate has been clear.
Along with that new-and-improved growth rate comes the stock’s 4% yield.
It’s also 10 basis points higher than the stock’s five-year average yield.
Better yield, better growth.
Not bad.
And I think this is one of the safer dividends among REITs.
Based on guidance for this year’s FFO/share, the payout ratio sits at just 62.1%.
If one leans more toward yield/income, this is a compelling dividend profile.
Revenue and Earnings Growth
As compelling as it may be, though, a lot of that stands on the past.
However, investors must always be anticipating the future, as today’s capital gets put on the line and risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be incorporated in the valuation process.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should provide us with the ability to gauge where the business might be going from here.
Regency advanced its revenue from $614 million in FY 2016 to $1.5 billion in FY 2025.
That’s a compound annual growth rate of 10.4%.
As good as this is, it doesn’t accurately indicate the true nature of Regency’s growth path.
REITs usually fund growth via debt and equity issuances (because a lot of cash flow goes out the door in the form of dividends, limiting internal reinvestment/growth abilities).
With a REIT, it’s imperative to look at profit growth on a per-share basis (which includes the impact of dilution).
And when assessing profit for a REIT, we want to do that using funds from operations (or adjusted funds from operations) rather than normal earnings.
FFO is a measure of cash generated by a REIT, which adds depreciation and amortization expenses back to earnings (giving us a more realistic picture of profit/cash flow for this type of entity).
Regency’s FFO/share grew from $2.73 to $4.64 over this period, which is a CAGR of 6.1%.
That’s a much more faithful representation of Regency’s long-term economic development.
And for a REIT, it’s actually very solid.
It’s borderline impressive.
Looking forward, CFRA does not currently have a three-year FFO/share growth forecast.
That’s unfortunate, as I do like to compare the proven past to a future forecast.
However, there’s still much to glean from what CFRA has put out.
CFRA has this year’s FFO/share forecast pegged at $4.89.
That’s running slightly ahead of Regency’s own guidance for 2026, which is $4.86 at the midpoint.
Either way, that paints a picture of roughly 5% YOY bottom-line growth.
CFRA notes that Regency frequently outperforms retail REITs due to its focus on grocery-anchored shopping centers.
Its portfolio has a necessity-based retail lean, giving it an edge in terms of revenue recurrence and resilience.
I think it’s fair to say that Regency is firmly on a path of mid-single-digit FFO/share and dividend growth.
Pairing that with the 4% starting yield gets one to a 9% to 10% type of annualized total return – before assuming any kind of multiple expansion.
On a low-drama REIT handing out much of that result in the form of growing dividends, it’s hard to complain about any of that.
Financial Position
Moving over to the balance sheet, Regency has a good financial position.
The REIT’s credit ratings are well into investment-grade territory: A3, Moody’s; A-, S&P.
Additionally, many of Regency’s top tenants are large, healthy retailers.
A common measure for a REIT’s financial position is the debt/EBITDA ratio.
Most of the REITs I’ve come across tend to be in a range between 3 and 7 on this ratio.
Regency has a net debt/EBITDAre ratio of 5.
Squarely in the middle.
Overall, Regency has a large, curated portfolio of grocery-anchored shopping centers which offer some protection against the threats of e-commerce.
And with economies of scale, deep industry expertise, and multiyear contracts locking in tenants, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Competition, regulation, and litigation are omnipresent risks in every industry.
Real estate demand is inherently cyclical, and a recession would likely negatively impact many of Regency’s tenants, which could then impact Regency itself, although the focus on grocery helps to mitigate this.
The capital structure of a REIT relies on external funding for growth (because most of the income is paid out to shareholders in the form of dividends), resulting in debt and equity issuances, which exposes the company to volatile capital markets and interest rates.
Elevated interest rates can hurt the company twice over: Debt becomes more expensive (through higher servicing costs), and equity can also become more expensive (because income-sensitive investors have alternatives, which can reduce demand for and pricing on the stock).
A recession can also hurt the company twice over: Demand for commercial real estate can cool, and equity issuances after a presumed drop in the stock’s price would come at a higher cost.
Regency has its fate tied to retail, which exposes the firm to various headwinds in this space (such as the rise of e-commerce, physical retail theft, and changing consumer trends).
Regency’s scale is an advantage, but it also introduces concerns regarding the REIT’s size and how the law of large numbers may start to impede growth on a relative basis.
Many of these risks are fairly standard for a retail-oriented REIT.
However, a recent correction in the stock has led to the valuation becoming slightly below standard…
Valuation
The P/FFO ratio is 15.5, based on midpoint FFO/share guidance for this year.
The P/CF ratio, which is a good analog for that, is also sitting at 15.5.
That’s slightly below its own five-year average of 15.8.
And the yield, as noted earlier, is higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 5.5%.
I’m basically splitting the difference here between Regency’s proven 10-year proven FFO/share growth and its more near-term trajectory.
Also, while the 10-year dividend growth rate is far lower than 5.5%, recent dividend raises have come in at higher levels than this.
Putting it all together, I think this strikes an appropriate balance.
The DDM analysis gives me a fair value of $70.80.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
To me, the stock looks roughly fairly valued.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates REG as a 4-star stock, with a fair value estimate of $94.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates REG as a 3-star “HOLD”, with a 12-month target price of $86.00.
Perhaps I was too conservative this time around. Averaging the three numbers out gives us a final valuation of $83.60, which would indicate the stock is possibly 10% undervalued.
-Jason Fieber
Note from D&I: How safe is REG‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 70. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, REG’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
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.
Disclosure: I have no position in REG.