Personal Finance

3 Dividend Stocks to Own for the Long Run

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bull silhouette

Stocks have been on a roll this year. The S&P 500 has rallied 24%, putting it right around its all-time high. Those two factors have stocks on the cusp of entering a new bull market.

Bull markets tend to enjoy long runways, suggesting there’s more room to run. That’s especially true for stocks that have yet to ride the wave of the current market rally, which includes several high-quality dividend stocks. Realty Income (NYSE: O), Mid-America Apartment Communities (NYSE: MAA), and Crown Castle (NYSE: CCI) have lost ground over the past year because of the impact of higher interest rates on the real estate sector. That headwind should fade over the coming year, setting these real estate investment trusts (REITs) up to potentially go on their own bull run in 2024 and beyond.

Creatively funding its growth

Shares of Realty Income have slumped about 10% in 2023. That has pushed the REIT’s dividend yield up to 5.4%. Higher interest rates have been the main factor weighing on the company’s share price. It has caused concerns that Realty Income might struggle to grow as its cost of capital rises.

However, the company has taken steps to sidestep those concerns. It agreed to buy fellow REIT Spirit Realty in a $9.3 billion deal, which includes assuming Spirit’s low-cost debt. It used its stock to buy an even more beaten-down REIT. The deal should thus boost the combined company’s adjusted funds from operations (FFO) by more than 2.5% next year. In addition, the larger-scale REIT will produce over $800 million in post-dividend free cash flow next year, giving it significant no-cost capital to make additional accretive investments. The Spirit Realty acquisition and those future deals should enable Realty Income to achieve its long-term growth target (4% to 5% annually) without issuing any equity.

Meanwhile, the main headwind weighing on its stock over the past year (rising interest rates) should fade in 2024, given the Federal Reserve’s forecast of three rate cuts in the coming year. That should lift the weight off its stock, potentially setting the stage for Realty Income to produce a strong total return from here.

Rent growth should reaccelerate next year

Shares of apartment REIT MAA have slumped about 15% this year. That sell-off has pushed its dividend yield up to 4.4%.

Despite what its slumping stock price might suggest, MAA is having a solid year. Its core FFO rose by nearly 11% per share through the third quarter. The REIT has benefited from solid rent growth, strong occupancy levels, and investments to enhance its portfolio.

While rent growth has been decent (4.5% in the third quarter), it’s slower than in recent years because of increased apartment supply in its markets. However, that headwind has started to fade as its markets have absorbed the new supply. That drives the REIT’s view that it should start seeing higher rent growth in late 2024. Meanwhile, the company should continue benefiting from its development and redevelopment investments. It has a couple of communities in the lease-up phase and three more that it should complete next year. The company is also renovating lots of older units, which are capturing much higher lease rates upon renovation. These catalysts position the company to continue growing its FFO at a decent clip. That’s allowing it to steadily raise its dividend (it recently boosted the payout by 5%, its 14th straight year of dividend growth).

A potential value-unlocking catalyst on the horizon

Shares of communications infrastructure REIT Crown Castle have also lost about 15% this year. That has driven its dividend yield up to 5.4%.

The tower owner is battling a few headwinds, including higher interest rates, lower capital spending by mobile carriers, and the merger of two key customers. These issues have slowed it down. Crown Castle expects its adjusted FFO to grow by only 2% this year, while it anticipates an 8% decline in 2024. The company has had to press pause on increasing its dividend through at least 2025 while it waits for growth to reaccelerate.

However, the company has a notable potential upside catalyst that could drive shares higher in 2024. It recently unveiled plans to conduct a comprehensive review of its fiber business following pressure from an activist investor. Analysts believe the business could be worth $11 billion to $15 billion in a potential sale. A sale could unlock the value of those assets while giving Crown Castle the cash to repay debt and fund higher-returning tower and small cell investments. That could boost its stock price.

These REITs could soar in 2024

While the S&P 500 appears to be on the cusp of beginning a new bull market, not all stocks have participated in the rally. Many REITs have remained under pressure because of higher interest rates and other headwinds. However, those headwinds could fade next year, setting Realty Income, MAA, and Crown Castle up to potentially go on their own bull runs in 2024 and beyond.

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Matthew DiLallo has positions in Crown Castle, Mid-America Apartment Communities, and Realty Income. The Motley Fool has positions in and recommends Crown Castle, Mid-America Apartment Communities, and Realty Income. The Motley Fool has a disclosure policy.

Bull Market Buys: 3 Dividend Stocks to Own for the Long Run was originally published by The Motley Fool

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