3 Magnificent S&P 500 Dividend Stocks Down 20% to Buy and Hold Forever

The S&P 500 has rallied about 25% over the past year. It has risen thanks to a strong economy and moderating inflation, with the latter factor enabling the Federal Reserve to start reducing interest rates.

However, not every stock has participated in the broader market’s bull run. Several top real estate investment trusts (REITs) are down about 20% from their recent highs, including Realty Income (O -0.77%), Prologis (PLD -1.54%), and Extra Space Storage (EXR -1.01%). That’s partly due to the Fed’s decision to slow the pace of future rate reductions since the economy remains strong while inflation hasn’t cooled off enough. Because of that, these excellent dividend stocks offer even higher dividend yields, making them great stocks to buy now and hold for a potential lifetime of passive dividend income.

It doesn’t get much better than this

Realty Income has done a magnificent job increasing its dividend over the years. The diversified REIT recently delivered its 128th dividend increase since its public market listing in 1994. It currently has streaks of 109 straight quarters and 30 consecutive years of boosting its dividend. The REIT has grown its payout at a 4.3% compound annual rate during that period.

With its share price down about 20%, this extremely consistent dividend currently yields around 6%. That’s several times higher than the S&P 500’s dividend yield (1.2%).

Realty Income should have no trouble growing its dividend in the future. Its portfolio produces very stable cash flow because it focuses on owning single-tenant properties net leased to the world’s leading companies. Those leases require that tenants cover all operating costs, including routine maintenance, real estate taxes, and building insurance. The REIT pays out a conservative percentage of its stable cash flow in dividends (75% of its adjusted funds from operations), allowing it to retain additional cash to invest in more income-generating properties. It also has one of the best balance sheets in the REIT sector. These factors should enable Realty Income to continue acquiring income-producing properties and increasing its high-yielding dividend in the future.

Leading dividend growth

Prologis has delivered leading dividend growth in recent years. The top industrial REIT has increased its dividend payment at a 13% compound annual rate over the last five years. That’s more than double the dividend growth rates of the S&P 500 and the REIT sector average (5% each). The company’s payout currently yields nearly 4%, thanks partially to the roughly 20% decline in its share price.

The company has benefited from strong demand for warehouse space, driven in part by the growing adoption of e-commerce. Companies with online sales need three times the space per $1 billion of sales to run their e-commerce operations compared to a brick-and-mortar store due to the higher product variety, greater inventory, and other factors.

Prologis is in an excellent position to capitalize on the continued growth in warehouse demand. It has a leading portfolio with over 5,600 buildings and 1.2 billion square feet of rentable space in 20 countries. Meanwhile, it has a massive land bank that could support $41 billion of future buildouts. The company is also expanding into new areas, like sustainable energy, digital infrastructure (i.e., data centers), and providing additional services to its tenants. Add in the fact that Prologis has one of the strongest balance sheets in the REIT sector, and it’s in an excellent position to continue delivering above-average dividend growth.

Extra-sized dividend growth

Extra Space Storage has been a dividend growth machine over the years. The leading self-storage REIT increased its dividend by nearly 245% over the past 10 years. That payout currently yields more than 4%, driven up by the 20% slump in its shares.

The company has benefited from several growth drivers. It has capitalized on steadily growing demand for storage (11.1% of U.S. households currently use storage, up from 5.5% 20 years ago). That has driven steady revenue growth at its existing properties while enabling the REIT to expand its portfolio. It has routinely gobbled up properties from developers while also acquiring large portfolios and other REITs (including buying Life Storage for $15 billion last year). It has also built out the sector’s largest third-party management business, which manages self-storage properties for other owners. As a result, the REIT now has the biggest share of the U.S. storage market at 14%.

Extra Space has plenty of room to continue growing. Its strong balance sheet will allow it to continue consolidating the sector (about 43% of the country’s storage capacity is institutional quality properties not currently owned by a REIT). Extra Space can also continue growing its third-party management platform and bridge lending/preferred equity funding program for developers, both of which often open the door to acquisition opportunities. That growth should enable the REIT to continue increasing its dividend.

Lower prices = higher dividend yields

The slump in these REITs has driven up their already attractive dividend yields to even higher levels. They all have strong growth prospects and balance sheets, which should enable them to continue increasing their dividends in the coming years. That makes them even better buys right now for those seeking a potential lifetime of passive dividend income.