The stock market is off to a strong start to the year. Despite a recent cooling off period, the S&P 500 has increased by more than 5%. A big catalyst is the assumption that interest rates will fall this year.
Despite this emerging catalyst, shares of many leading real estate investment trusts (REITs) have underperformed this year. Real estate income (NYSE:O) And prolog (NYSE:PLD) Are two of the more notable laggards. NOuch looks like A good time to double down on these top dividend stocks.
Solid integrated growth with upside potential
Realty Income shares are down more than 5% this year. The main culprit is the Federal Reserve’s continued delay in cutting interest rates while it waits for inflation to fall closer to its target level. Interest rate cuts would benefit the REIT. They would lower it the price of Capital city by reducing borrowing costs and likely an increase in the share price, which would put the REIT in a stronger position for acquisitions.
However, real estate income can grow Only This year is doing well without the Fed’s help. The company recently completed its accretive acquisition of fellow REIT Spirit Realty. In the meantime, the combined company will generate even more excess free cash flow after payment of the dividendThis gives the company free capital to finance value-adding businesses. The company estimates it can acquire about $2 billion in real estate this year without obtaining additional financing. Factoring in rental growth, these catalysts should allow the REIT to grow its adjusted funds from operations (FFO) by 3.3% to 5.3% per share this year. That fits with its long-term target range of 4% to 5% annually.
Meanwhile, falling interest rates would likely allow the REIT to invest even more money in new properties this year. This could increase the growth rate even further and further support continued dividend growth. (Realty Income increased its payout each year Add to that the attractive current income yield of around 6%, and Realty Income could generate double-digit total returns in the coming years from here.
Hitting a speed bump
Prologis shares have fallen more than 20% this year. It was a big driver First quarter earnings reportwhere the leading Industrial REIT has slightly lowered its forecast for 2024. “While operating conditions are healthy the majority “In our markets,” CEO Hamid Moghadam said in the first-quarter earnings press release, “customers continue to focus on cost control, which is a drag.” decision making and the pace of leasing.” The CEO noted: “One volatile and persistent high interest The interest rate environment and increasing geopolitical concerns are contributing to this indecision and its near-term impact on net absorption.
Despite this near-term slowdown, the REIT still expects to grow its core FFO by nearly 8% per share this year. Although the company takes a more cautious view for this year, it sees these “adjustments as more of a matter of timing, as the outlook for new deliveries remains very favorable,” said CFO Tim Arndt.
The company expects to grow its core FFO per share by an average of 9% to 11% through 2026, assuming market rents increase moderately. Even if market rents don’t rise, annual core FFO growth per share is likely to be around 8.5%.
This means the REIT is able to continue to increase its dividend above average. Over the past five years, an average annual growth rate of 13% has been achieved, more than double the average of 5% S&P 500 and other REITs. With the dividend yield approaching 4% following this year’s sell-off, Prologis could easily generate double-digit annual total returns over the next few years as the company delivers above-average core FFO and dividend growth.
Lower stock prices = higher dividend yields
Top-rated REITs Realty Income and Prologis have slumped this year as the Federal Reserve holds off on cutting interest rates until inflation is reached more under control. As a result, their dividend yields have risen to an even more attractive level.
Both REITs can grow Only This year we are doing well, even if the Fed doesn’t cut interest rates. Meanwhile, the eventual rate cuts would be another catalyst for growth. With strongly built in With total return potential and an emerging upside catalyst, now is a good time to double down on these top dividend stocks while they’re still on sale.
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Matt DiLallo holds positions at Prologis and Realty Income. The Motley Fool has positions in and recommends Prologis and Realty Income. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
“2 Dividend Stocks to Double Up Right Now” was originally published by The Motley Fool