Stunning Discovery: This 6% Dividend-Yielding Real Estate Investment Trust Emerges as a Primary Investment Choice for 2025
Stunning Discovery: This 6% Dividend-Yielding Real Estate Investment Trust Emerges as a Primary Investment Choice for 2025
Finding reliable high dividend yields can be tough. Remember, a stock's dividend yield is calculated by dividing the company's announced payout by its share price. A high yield might hint at potential risk if the market can't support a higher share price. But not every time. Equity Lodging Trust (-0.77%) is a great example.
As a standard practice, this renowned real estate investment trust (REIT) (similar to other REITs) usually distributes a significant portion of its revenue to its shareholders. Despite the struggles, the stock is trading close to its 52-week low, with a yield of 6%.
Often, a stock's difficulties can stem from external factors, not internal issues. I believe that's the situation here. I'll outline the factors possibly impacting Equity Lodging Trust's stock price and why this could be a promising high-dividend stock prospect for 2025.
Interest rate challenges are hampering Equity Lodging Trust
Equity Lodging Trust, like other REITs, acquires and leases real estate. This REIT specializes in leasing properties with net leases to single-tenant retail establishments, such as convenience stores, grocery stores, dollar stores, drugstores, and restaurants. As a REIT, it doesn't pay corporate taxes since it distributes at least 90% of its income to shareholders. For this reason, REITs typically make excellent dividend stock options.
REIT stocks are generally impacted by interest rates due to two main reasons:
First, since REITs do not retain earnings, they must issue shares and borrow money to finance growth (property acquisitions, etc.). Higher rates make borrowing more expensive (unfavorable for the business), while lower rates make debt cheaper (beneficial for the business). Second, dividend stocks are less appealing to investors when safer, high-yield alternatives are available. For example, many income-focused investors might prefer a high-yield savings account to a dividend stock if the yield is comparable because it's considered safer.
You may have read news about the Federal Reserve reducing the economy's primary interest rate. This can affect how banks borrow money from each other. The 10-year U.S. Treasury yield (rate) serves as a benchmark for corporate debt, and it has continued to climb. You can observe the inverse relationship between the 10-year rate and Equity Lodging Trust's share price:
Economic factors decide how Treasuries behave, and the rising yield could be due to various factors, such as inflation concerns or political issues. The primary takeaway is that Equity Lodging Trust's stock may struggle until the 10-year Treasury rate stops rising.
Yes, you can rely on the dividend. Here is why.
The crucial point today is that external factors only affect Equity Lodging Trust's business to a certain extent. Higher rates could potentially hinder Equity Lodging Trust's growth by making debt more expensive, but it doesn't alter the overall picture of this strong company.
Equity Lodging Trust is an outstanding dividend stock and will likely maintain its status. The company boasts a 31-year record of increases in its dividend, overcoming challenges such as the dot-com crash of 2000-2001, the Great Recession of 2008-2009, and the COVID-19 pandemic. Today, the dividend is financially solid.
Analysts estimate Equity Lodging Trust's 2024 funds from operations (FFO) will amount to $4.20 per share, equating to a comfortable dividend payout ratio of 75%. In other words, the company's cash earnings from its operations would have to decline dramatically (more than 25%) before Equity Lodging Trust's ability to cover its dividend organically becomes strained.
The company manages a diverse real estate portfolio centered on tenants who operate recession-resistant businesses, lowering the likelihood of rent defaults. Furthermore, Equity Lodging Trust enjoys an A- credit rating from S&P Global, which is a robust credit rating for a REIT, helping bridge financial gaps during crises, like the pandemic in 2020.
Equity Lodging Trust is a genuine value for 2025
Once again, Equity Lodging Trust's stock struggles do not accurately reflect the business. Through nine months of 2024, the company reported FFO per share of $3.14, an increase from $2.99 a year ago. Further, analysts estimate Equity Lodging Trust will grow at an annual average rate of 6% over the long term.
The chart below is exciting due to these reasons. The stock trades at just over 13 times its cash from operations (a proxy for FFO), a significant discount to its typical rate over the past decade. Investors get a dependable 6% dividend yield, plus an estimated 6% in growth, offering the potential for 12% annualized total returns without affecting the stock's valuation.
I consider the current valuation a sufficient margin of safety in case Treasury rates remain high for an extended period. If rates eventually decrease, the potential valuation increase could generate market-beating total returns for long-term investors. Additionally, investors can reinvest Equity Lodging Trust's dividend to maximize compounding.
Equity Lodging Trust is a top-notch dividend stock having enough upside at this price to interest investors beyond just high-yield seekers. That makes it an appealing buy to kick off the new year.
In light of the increasing 10-year U.S. Treasury yield, investors might prefer safer high-yield alternatives over dividend stocks, potentially affecting the appeal of Equity Lodging Trust. Despite this, Equity Lodging Trust's strong financial position and long history of dividend increases make it a resilient dividend stock prospect.
Investors looking for value in the REIT sector might find Equity Lodging Trust particularly attractive due to its current discounted valuation, offering a dependable 6% dividend yield along with an estimated 6% growth potential.