Agree Realty (ADC -0.26%) has become a magnificent dividend stock over the past decade. The real estate investment trust (REIT) has grown its dividend at a 5.6% compound annual rate during that period. It also switched from making quarterly dividend payments to a monthly schedule, increasing its attractiveness to those seeking a recurring income stream.
Despite Agree Realty's success, shares of the REIT have slumped about 25% from their peak level in 2022. That sell-off and a steadily rising payout have pushed its dividend yield up to 5.1%, which is significantly higher than the S&P 500 (1.4% dividend yield). With more growth ahead, it's a great dividend stock to buy and hold for a potential lifetime of recurring passive income.
Still growing despite a stiff headwind
Higher interest rates have been the main factor weighing on Agree Realty's stock over the past couple of years. Higher rates affect the value of real estate, driving it down to boost income yields above lower-risk alternatives like bonds. They also make it more expensive for REITs like Agree Realty to borrow money to fund new acquisitions.
While higher rates are a growth headwind for the REIT, it's still growing. The company recently reported its first-quarter results and grew its adjusted funds from operations (FFO) per share by 4.6%, compared to the year-ago period.
The company benefited from acquiring nearly $1.2 billion of properties in 2023 and invested about $150 million into development projects. These growth investments enabled the REIT to raise its monthly dividend payment by 2.9% over the past year.
Agree Realty has continued to find attractive investment opportunities this year. It invested $140 million in 50 retail net lease properties in the first quarter.
That total included spending $123.5 million to acquire 31 properties. It purchased this real estate at a weighted average capitalization rate of 7.7%. The company capitalized on lower real estate values to lock in higher income yields.
Built to grow in any environment
Agree Realty remains in a strong position to continue expanding its real estate portfolio. It has a conservative dividend payout ratio for a REIT (72% of its adjusted FFO at the end of the first quarter), which enables it to retain meaningful free cash flow to fund new investments.
The REIT also has a fortress-like balance sheet. Its leverage ratio was 4.3 times at the end of the first quarter after accounting for the impact of an unsettled forward equity transaction. That's a very low level for a REIT, especially one focused on owning highly resilient net lease real estate. Meanwhile, it has no debt maturities until 2028 and ended the period with over $920 million of total liquidity, including cash, outstanding forward equity, and availability on its revolving credit facility.
Agree Realty's financial resources drive its view that it can acquire around $600 million of real estate this year despite continued interest-rate headwinds. That should enable the REIT to grow its adjusted FFO to between $4.10 and $4.13 per share, about 4%-5% higher than last year. The REIT can deliver that growth without deviating from its core strategy or increasing its risk.
Because of the company's conservative strategy and financial profile, it's positioned to continue growing in the future. It also has built relationships with several high-quality retailers, which provides built-in expansion potential. It can purchase their existing properties in sale-leaseback transactions and provide them with development funding.
The company estimates that its existing partners own over 165,000 properties suitable for net leases. Given that it currently owns less than 2,200 properties, it has a long growth runway ahead. It can continue to be disciplined and selectively invest in properties that meet its high standards.
A low-risk dividend stock built for the long haul
Agree Realty has done an excellent job growing its dividend over the last decade. It has taken a conservative approach, building a high-quality portfolio guarded by a fortress-like balance sheet.
That strategy enables it to continue growing in almost any environment. Add in its massive growth runway and attractive current valuation, and Agree Realty looks like an ideal dividend stock to buy and hold for the very long term.
