The smartest dividend stock to buy with $20 right now
My pick for a stock trading at less than $20 per share that has considerable long-term growth potential is Agricultural partners (REITs 0.36%). This company is organized as a real estate investment trust (REIT) and focuses on – you guessed it – farmland, particularly in the United States. On Friday, its stock closed at $14.11.
Farmland Partners is one of only two publicly traded farmland REITs. Gladstone Land is the other.
Before we dive in, a word of warning: while it’s possible to find some relatively unknown gems among low-priced stocks, overall this space tends to be quite risky.
Image source: Getty Images.
Why invest in REITs?
Real estate investment trusts are attractive because they tend to pay strong dividends. In exchange for the special tax treatment they receive, they are required to pay out at least 90% of their annual income in the form of dividends.
Farmland Partners’ dividend currently yields around 1.7%. That’s pretty low for REITs, but the stock might suit investors more concerned with long-term capital appreciation than current income.
Why invest in US farmland?
In my view, prime US farmland is poised to increase significantly in value over the long term, due to supply and demand dynamics.
The supply of arable land is expected to decrease over time due to continued development and climate change, which leads to an increase in the frequency of severe droughts in this country and around the world. In contrast, demand for crops grown on farmland is expected to continue to grow. The world’s population is growing and more and more people in developing countries are entering the middle class.
Additionally, the pandemic and the Russian invasion of Ukraine have underscored the benefits for companies (and entire countries) of having domestic supply chains. This is especially true when it comes to supply chains for essential goods and products, such as food.
The current high inflation environment is another reason why now is a good time to consider investing in farmland, which investors can do by buying shares in a farmland REIT. Investments in physical assets tend to outperform those in other categories when inflation is high.
Farmland Partners activity and key statistics
Farmland Partners, which went public in 2014, buys high-quality US farmland that it leases to farmers to grow a variety of crops. It also provides auction, brokerage and third-party farm management services.
The company’s portfolio included approximately 160,700 acres of owned farmland and 25,000 acres of managed farmland in 19 states, as of the end of the first quarter. With over 100 tenants and 26 types of crops grown on its farms, the company has good geographical, tenant and crop diversity. The portfolio vacancy was 0%.
| Company | Market capitalization | Dividend yield | Futures Price/AFFO* Based on 2022 Company Forecast | 2022 Year-to-Date Total Equity Return | 5-year total stock return |
|---|---|---|---|---|---|
| Agricultural partners | $706 million | 1.7% | 50 to 64** | 18.5% | 83.8% |
| S&P 500 Index | — | 1.59% | — | (22.3) | 65.2% |
Data sources: Yahoo! Finance and YCharts. Data as of June 17, 2022. *AFFO = adjusted funds from operations (FFO). FFO is like “earnings” for REITs; it is the primary driver of shareholder payouts and adds items such as depreciation and amortization to net income. **Calculated by the author.
Last month, the company announced that it was increasing its quarterly dividend by 20% to $0.06. CEO Paul Pittman attributed the increase to “strong earnings growth, significant asset appreciation, reduced [debt] leverage, and better visibility of expenses resulting from the dismissal of the class action litigation.
This dividend hike is the first since 2018. The 20% increase suggests management is very confident about the company’s future profitability performance.
Shares of Farmland Partners are trading between 50 and 64 times the AFFO 2022 range for which management has guided. This is a relatively high valuation, but attractive stocks are rarely cheap.
Finally, investors can expect some cyclicality with a farmland REIT, as there is cyclicality with agricultural commodity prices, which are currently at or near historic highs. However, the long-term trend will be up for these commodities for the supply and demand reasons discussed, in my opinion. If this thesis proves to be correct, the shares of Farmland Partners should be winners in the long term.