3 great dividend-paying stocks to add to your holiday shopping list

Dividend stocks are the gift that keeps on giving. They send their investors a share of the profits every quarter. Even better, these payments tend to increase every year.

Many dividend-paying stocks are on sale this year, their prices dragged lower by the stock market’s sell-off. As a result, they offer higher dividend yields. Three Fool.com contributors think Digital Real Estate Trust (NYSE: DLR), Highwoods Properties (NYSE:HIW)and Residential Equity (NYSE: EQR) are great additions to your holiday stock shopping list.

A Great Dividend Growth Stock at a Lower Price

Matt DiLallo (Digital Real Estate): First data center real estate investment trust (REIT) Digital Realty is on sale these days. The company’s share price has fallen almost 40% this year. This sell-off pushed its dividend yield to 4.5%, the highest level in nearly a decade.

This is an attractive revenue stream for a company with a great track record of growing payouts. Digital Realty has increased its dividend for 17 consecutive years, since its IPO in 2004. That puts it in a select group of REITs that have increased their payouts every year since their inception.

Digital Realty should be able to continue to grow its dividend going forward. Demand for data center capacity remains robust. Digital Realty posted record quarterly bookings in the third quarter, its third record in the past four quarters. This helps maintain high occupancy rates at its existing locations while allowing the business to continue expanding. The company has a growing portfolio of ongoing development projects and has already pre-leased 60% of this capacity.

The REIT also has a long history of value-creating acquisitions to drive additional growth. The company recently acquired a majority stake in Teraco, valuing that company at $3.5 billion. The deal adds South Africa to Digital Realty’s global platform as it expands into this fast-growing continent.

Digital Realty’s growth engines should allow the REIT to continue to increase its high-yield dividend going forward. With its cheaper stock price, it’s a great dividend-paying stock to consider buying this holiday season.

Highwoods Properties offers 7% dividend on Sunbelt office holdings

Mark Report (Highwoods Properties): Demand for office space has fallen off a cliff during the pandemic and looks likely to stay there in the future. But that doesn’t mean there aren’t office REITs worth rocking this holiday season.

A good one to consider is Highwoods Properties, buyers/owners/operators of properties in what they consider the “best business districts” in Dallas, Tampa, Richmond, Nashville, Atlanta, Charlotte and Raleigh.

What these markets have in common, of course, is that they develop Sunbelt metros. Highwoods focuses on high-end premises within these markets and has been able to retain leased space even as rent increases. This strategy and the stock’s current metrics point to good prospects here.

Analysts give the stock a consensus target price of $32, which would represent a gain of about 13% from the roughly $28 it was trading for at the time of this writing. This price is down about 35% since the start of the year, but up about 11% in the past month.

Even with this recent jump, I think stocks could be undervalued for both potential share price growth and dividend income. For example, Highwoods has steadily increased its funds from operations (FFO) per share for a decade, but still trades at a low 5.7 price-to-FFO ratio.

For that, you get a current yield of around 7% after five consecutive years of increasing dividends. Add to that a very low payout ratio of 37% based on cash flow, and there is reason to believe that more substantial payouts could be in sight.

I purchased Highwoods Properties to add office space to the collection of REITs I have been building for retirement growth and especially income. Highwoods seems well placed to take advantage of what remains of life in this area.

Don’t be afraid of falling house prices

Brent Nyitray (Residential Equity): Equity Residential is a REIT that focuses on high-end apartments in fast-growing urban areas with a knowledge-based job market. The Company has urban apartment complexes in Southern California, Seattle, New York, Boston and the San Francisco Bay Area. The Company is focused on urban markets that have high prices for single-family homes, a strong labor market and high barriers to entry to build new housing.

Over the past few months, house price appreciation has stalled. This is due to declining affordability, especially for the first-time home buyer who is pressured by higher mortgage rates and prices. Investors also pulled out of the market. The torrid mid-2020 to mid-2022 home price appreciation is over, at least for now.

If house prices start falling, does that mean rents will go down for apartment REITs like Equity Residential? In the next two years, probably not. According to some studies, rent inflation lags house price appreciation by 21 months, or just under two years. Indeed, rents are only reset once a year at the fastest, and are often only really reset once the tenant has left (most landlords are reluctant to increase a tenant’s rent by 20% if this is the new market rate).

Equity Residential owns properties in metropolitan statistical areas that have experienced the fastest growth since the onset of the COVID-19 pandemic. This appreciation is just beginning to be reflected in rents. The stock of residential stocks has fallen 30% this year due to rising interest rates. At current levels, it has a dividend yield of 4% and is an attractive stock for an income investor.

10 stocks we like better than Digital Realty Trust
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They just revealed what they think are the ten best stocks investors can buy right now…and Digital Realty Trust wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of November 7, 2022

Brent Nyitray, CFA has no position in any of the stocks mentioned. Marc Rapport has positions in Digital Realty Trust and Highwoods Properties. Matthew DiLallo holds positions at Digital Realty Trust. The Motley Fool fills positions and recommends Digital Realty Trust. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.