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Buy This Stock Before It Becomes a Dividend Aristocrat

The big-picture reason why investors like the healthcare real estate investment trust niche is the baby boom generation. Essentially, demand will rise as more and more baby boomers crest into their retirement years. But healthcare isn't the only real estate sector that's going to be affected by this demographic trend. Here's why Equity Lifestyle Properties (NYSE: ELS) is set to benefit, too, while paying investors a growing dividend along the way.

Equity Lifestyle caters to an interesting niche

Equity Lifestyle Properties owns a collection of mobile home parks, recreational vehicle resorts, and marinas. They are generally located in coastal markets, on or near a body of water, and in vacation and retirement areas. In other words, they are right where retired people are likely to be heading once they quit the daily grind. That segment of the population is set to grow materially over the next decade or two as the baby boomers continue to transition to a new stage of life.

Image source: Getty Images.

Before you brand the properties this real estate investment trust (REIT) owns as less than desirable, you should take a deeper dive. For example, the mobile home sector is very low-maintenance and, importantly, provides customers with an affordable alternative to renting or buying a property. A mobile home can save a person hundreds of dollars a month in costs compared to apartments while the average cost of a manufactured house can be less than a third of what it would cost to buy a traditional home. That's a lot of savings and makes a manufactured home a desirable option for people on a budget. Meanwhile, the properties that Equity Lifestyle owns aren't rundown locations that you might see in a horror movie, they are modern, well kept, and filled with amenities.

Recreational vehicle parks are a bit more transitory, given the nature of the RV lifestyle in general. But with more people looking to hit the road in retirement, demand here is likely to increase as well. Just like with mobile homes, Equity Lifestyle owns desirable locations, with the tenant basically taking care of the costs of the "housing." It's another low-maintenance model, where location and amenities are key differentiating factors.

Marinas are a relatively new addition to the mix that comes with more costs. However, the boat, like the RV or the mobile home, is the responsibility of the lessee. And even more so than either of the other two sectors, location is vital for a marina. It's also a lifestyle choice to own a boat, but one that transcends retirement and housing choice, expanding Equity Lifestyle's reach a bit beyond its core. However, the basic model is very similar, so it's a complementary expansion.

The track record

With that rough background on the business, it's time to take a closer look at the success Equity Lifestyle has achieved. First off, it has increased its dividend every single year for 17 consecutive years. That makes it a Dividend Achiever and puts it firmly on track to get to the Dividend Aristocrat level in relatively short order. Given the strength of its properties, there's really no reason to believe that it won't get to 25 consecutive years of dividend hikes.

But there's another bit of the dividend record that investors should pay close attention to: dividend growth. Over the past decade, Equity Lifestyle's dividend has increased at an annualized rate of 15%. That's roughly five times the historical rate of inflation growth. To be fair, dividend growth over shorter periods is below that heady figure, but the most recent hike of 6% is still a pretty impressive number for a REIT given the pandemic backdrop in 2020.

ELS data by YCharts

There is one problem here, however. Equity Lifestyle's dividend yield is a miserly 1.7%. That's more than you'd get from an S&P 500 Index fund, but it's not hard to find other REITs with higher yields. In fact, the company's yield is near the lowest point its been in the past decade. Investors appear to appreciate just how well-positioned this REIT is to benefit from the aging of the baby boom generation and have boosted its stock price, which has depressed the yield. So, right now might not be the best time to buy in on the stock -- but don't move on and forget about it. The market can be fickle and offer up opportunities if you are paying attention.

Equity Lifestyle is on the wish list

Equity Lifestyle has a unique and advantaged model in the housing space that is set to benefit for many years into the future. Investors have bid the stock up accordingly, noting the REIT's strong dividend history. However, this is the type of company you would probably want to add to your portfolio -- at the right price -- which means put it on your wish list just in case the stock sells off and the yield spikes to, say, the 2.5% range, which would be a historically attractive point to buy in. Just make sure you are ready, because such buying opportunities don't come around often (and usually don't last long) for a solid dividend-growth-focused REIT like Equity Lifestyle.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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