Interest rates are going up, and the Federal Reserve has made it clear that we shouldn’t expect anything different in the coming months.
And that’s changing the way we think about dividends.
You see, the Fed has a dual mandate to maintain full employment and to maintain price stability. It’s found success on the first part, given that we have a bona fide labor shortage across most of the economy. But it’s failing on the second part, considering inflation hasn’t been this high in four decades.
It’s safe to bet that the Fed will err on the side of hawkishness (i.e. more aggressive action) until something fundamentally changes. In other words, expect the Fed to raise rates for a while.
In a high inflation and rising rate environment like this, it pays to focus on dividend growth over dividend yield.
I like yield, of course. Who doesn’t like a fat dividend payment hitting their account each quarter?
But if your mission is to stay ahead of inflation and rising rates, dividend growth is the priority.
With that in mind, let’s look at a dividend stock in a booming business that will help you achieve that goal.
Beat Inflation With a Rental REIT: American Homes 4 Rent
American Homes 4 Rent (NYSE: AMH) is a leading real estate investment trust (REIT) in the single-family rental home market.
American Homes owns a sprawling portfolio of single-family homes spread across 22 states. As of the end of last year, the REIT owned over 57,000 homes.
If you’ve been in the market for a home of late, you know that supply hasn’t kept pace with demand. Millennials have grown up and embraced adulthood at a time when new construction, particularly of starter homes, is low compared to years past.
This basic dynamic isn’t going to change overnight. Even if America’s homebuilders started breaking ground on a record number of new homes tomorrow — and they’re not — the inventory wouldn’t be available for about a year.
So, supply conditions should remain tight for a long time to come, which is good news for American Homes 4 Rent as more Americans opt to rent while supply catches up.
AMH’s Dividend Yield and Green Zone Rating
At 1.8%, the REIT isn’t boasting a high yield. But again, we’re going for dividend growth.
American Homes hiked its dividend 80% this past quarter and that was after doubling it the year before. We shouldn’t expect 80% to 100% dividend growth every year, but we should at least come out well ahead of inflation in the long run!
American Homes 4 Rent rates a “Neutral” 54 out of 100 on our Green Zone Ratings model. But it scores well where I want it to. I’ll explain below.
Growth — American Homes rates a stellar 95 on our growth factor, putting it in the top 5% of all stocks in our universe. This is a boring REIT that buys rental houses, not a trendy new iPhone app or tech stock. We don’t see that kind of growth in the dividend stock or a REIT. While I can’t realistically expect the dividend to grow at its current, torrid pace forever, I don’t see it slowing anytime soon.
Volatility — High-rated growth stocks and volatility go hand-in-hand. But American Homes 4 Rent scores a 94 on our volatility factor, meaning it’s less volatile than all but 6% of stocks in our universe. Real estate is subject to booms and busts, of course. But demand for rental property doesn’t fluctuate all that much. Whatever happens in the economy, you still need a roof over your head.
Momentum — American Homes 4 Rent rates a 43 on momentum. Shares have traded sideways since August of last year. That’s OK. It looks like the stock bottomed before the broader market during the recent bout of volatility, and now AMH shares have trended higher since the middle of February.
Quality — REITs don’t often rate well on our quality factor, and American Homes 4 Rent is no exception with a quality factor rating of 43. Due to high non-cash expenses like depreciation, REITs tend to have depressed GAAP earnings (the standard set of principles public companies in the U.S. must follow). It’s a known issue, and one we have to take into account when looking at REITs.
Value — The same goes for value. REITs tend to score low on our value factor, and American Homes scores a rather uninspiring 30 here. But again, we’re focused on AMH as a growth play rather than a value play.
Size — AMH is a large REIT with a $13 billion market cap. American Homes 4 rent scores a 13 on size.
Bottom line: Owning rental homes sounds great in theory. But the actual management can be a headache, and many investors lack the capital to put together a proper portfolio of rental homes.
American Homes 4 Rent gives you access to the rental market, but it does so in an easily tradeable package. And with a growing dividend, this REIT should serve you well into the future.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.