Summary
- Public Storage is up year-to-date. That's pretty rare among publicly-traded REITs.
- The company is benefiting from owning recession-resistant assets.
- While Public Storage hasn't increased its dividend in recent years, the outlook is better than it may seem at first.
- Public Storage is fairly valued as is, and has a great deal of hidden value as a uniquely high-quality inflation hedge.
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It's generally been a difficult year for the REIT sector. The novel coronavirus has absolutely crushed certain segments of commercial real estate such as offices, malls, and shopping centers. And even seemingly safer holdings such as apartments have still underperformed the market due to uncertainty around the economic outlook going forward.
One category that isn't struggling, however, are the storage REITs. Public Storage (PSA) in particular has advanced to new 52-week highs recently, even as its peer REITs are still stuck in the mud. Add it up, and PSA stock has outperformed the industry benchmark by 23% year-to-date:
So is it time to cash in PSA stock and rotate the funds into struggling REITs? I'd say, "not so fast." Here's why I'm maintaining Public Storage shares as my largest holding within the REIT sector.
Now, More Than Ever, Focus On Safe Dividends
The REIT sector has gotten clocked in 2020. Aside from the obvious economic impacts of the virus, also think about investor behavior.
The main draw to most REIT investments is the dividend yield. REITs traditionally offer a significantly higher dividend than the S&P 500 as a whole, and the disparity has grown in recent years. In a zero interest rate world, REITs paying 5%, 7%, or even more appeared to solve the problem of falling retirement incomes as interest rates have declined.
However, as a stock's yield goes up, often, its risk increases as well. The market is smart about this sort of thing; generally if you see a large dividend yield, the associated risk is also elevated. Thus, it's hardly surprising that many of the REITs that saw their yields spike in 2018 and 2019 -- such as the malls and shopping centers -- have slashed or eliminated their payouts this year. Other REIT subsectors such as offices seem vulnerable to major dividend reductions in coming years as well as a result of this year's events.
Against that backdrop, it increases the appeal of a REIT with a safe dividend. Enter Public Storage. It's paid out $2/share in dividends every quarter since 2016:
