This Passive-Income Machine Has Hit the Accelerator

Stag Industrial (NYSE: STAG) churns out dividend income like clockwork. The real estate investment trust (REIT) pays a high-yielding monthly dividend. At 3.5%, it's more than double that of the S&P 500 . Adding to its appeal, Stag Industrial has increased its dividend every year since it went public in 2011.

Slow and steady has been the name of the game for this industrial REIT over the years. But it has shifted into a higher gear this year, fueled by robust demand for industrial real estate . With more growth ahead, the REIT should have no trouble continuing to increase its high-yielding dividend.

Stomping on the accelerator

Stag Industrial recently reported exceptional operating results for the second quarter and first half of 2024. The REIT's core funds from operations (FFO) per share surged 8.9% in the second quarter (and 7.1% in the first half), while its cash available for distribution jumped 9.1% (and 9% in the first six months). That's a meaningful acceleration from last year, when its core FFO rose by 4.7%, and its cash available for distribution increased by 5.4%.

The main driver was the robust demand for industrial real estate. Existing tenants are renewing at a strong clip (a 82.2% retention rate) and much higher lease rates (up 35.3% on a cash basis). Meanwhile, the company is having no trouble filling vacated properties with new tenants. It has signed new leases on existing spaces at a 24.7% higher rate on average compared to the prior leases.

This robust demand is keeping occupancy high: 97.5% at the end of the second quarter. These catalysts drove strong growth in same-store net operating income (NOI) of 6.1% in the second quarter and 6.5% in the first half.

Stag Industrial's acquisition pace has also accelerated. The REIT purchased 10 properties for $225.6 million in the second quarter at an average cash capitalization rate of 6.7%. That's up from just one property for $50 million in the first quarter at a 6.1% cap rate, and only 16 buildings for $293.7 million at a 6.2% cap rate for all of 2023.

After patiently waiting for the market to improve, the REIT finally found attractive investment opportunities as sellers lowered their asking prices.

More growth ahead

Stag Industrial could continue to grow at an accelerated rate for the next few years. It typically signs long-term leases, and because of that, it's still not fully capturing the strong market for industrial real estate.

As legacy leases expire, it can sign new ones at higher market rates. That drives the REIT's view that its cash same-store NOI will grow by 4.75% to 5.25% this year, roughly double its historical rate, 2.5%.

Meanwhile, it has a robust investment pipeline. At the end of the second quarter, the company had 162 buildings in its acquisition pipeline, representing $3.7 billion of investment potential. It won't close most of those deals, but it does expect to invest $350 million to $650 million into new properties this year.

Stag Industrial has ample financial flexibility to capture these opportunities as they emerge. A conservative dividend payout ratio (less than 70% of its cash available for distribution) enables it to retain cash to fund new investments.

It also has a low leverage ratio: 4.9 at the end of the second quarter, below the low end of its 5 to 5.5 target range. Its dividend payout ratio and leverage level have steadily fallen over the years as the REIT focused on improving those key financial metrics. Because of that, it has more financial flexibility these days.

More income growth ahead

Stag Industrial's earnings growth rate has surged, as has its acquisition volume. It should be able to continue growing at a quickened pace in the coming quarters due to its built-in rent growth, robust investment pipeline, and strong balance sheet . Because of that, the REIT should also be able to continue increasing its monthly dividend, which could grow faster in the future. These features make it a solid option for those seeking a steadily rising monthly income stream.

Matt DiLallo has positions in Stag Industrial. The Motley Fool has positions in and recommends Stag Industrial. The Motley Fool has a disclosure policy .