2 dividend stocks that must be on your watch list

Credit: Mark, Vicki, Ellaura and Mason

Real estate investment trusts (REITs) have enjoyed a great run over the last five years. The S&P/ASX 200 A-REIT index is up over 70% in five years, compared to the S&P/ASX 200 index that is up 30% over the same five years.

REITs are a good way to get more diversification in your portfolio, with a good starting dividend yield.

There are many different types of REITs; for example Dexus Property Group (ASX: DXS) focuses on commercial property, whereas Scentre Group (ASX: SCG) owns shopping centres.

There are a few REITs that are laser-focused on one particular type of building like BWP Trust (ASX: BWP) which owns warehouses and leases them to Bunnings owned Wesfarmers Ltd (ASX: WES). These more specific REITs can make for good investments if you think they are part of a growing industry.

Here are two REITs that I think would be a good addition to a dividend portfolio.

Rural Funds Group (ASX: RFF) is the only ASX-listed diversified agricultural property REIT. It has a wide-ranging property portfolio including cattle, almonds, macadamias, wineries and poultry.

Its current market capitalisation is around $333 million and it has recently entered the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) due to its continued growth.

Very little of Australia’s farmland is leased when compared to Europe and North America and there is scope for Rural Funds Group to acquire a lot more farmland.

Its property portfolio is also diverse geographically; with properties in South Australia, Victoria, New South Wales and Queensland. The more diverse its portfolio becomes, the less exposed to risk it is due to any one location or farm type.

Rural Funds Group is currently trading at a price/book ratio of 1.33 (source: Commsec), which is a discount to the sector’s price/book ratio of 1.48.

Rural Funds Group has a current yield of 5.62% and is forecast to pay 9.64 cents per share over the course of FY17. This means it’s trading on a forward yield of 5.99%.

One thing that I also like about Rural Funds Group is that it owns a significant amount of water entitlements to help its tenants with their farms. Water is likely to grow in value as a resource as the years go by, which will help the balance sheet.

National Storage REIT (ASX: NSR) is the largest self-storage owner-operator in Australia. It has a market capitalisation of $744 million and 105 facilities across Australia and New Zealand.

National Storage has a dividend yield of 5.7% and has grown its half-yearly dividend by 15.8% since June 2014 to 4.4 cents per share (cps). It’s expected to grow its dividend to 9.8cps by FY18, this suggests it’s trading at a forward yield of 6.53%.

Storage seems to be a growing trend with consumers. These days the new properties being built, particularly apartments, are smaller than what properties were in the past. This means there’s less storage space at home (even with all the clever IKEA solutions) and as a result there’s more demand for National Storage’s services.

Since listing, National Storage has grown its number of facilities mainly through issuing new shares and debt. Investors need to be wary that even if overall profitability is increasing nicely, earnings per share may not be growing as much.

Foolish takeaway

These two REITs suit investors looking for a stable, growing dividend stream from property. However, REITs may take a short-term hit to their share price if the Fed increases interest rates in December, which could be an opportune time to buy.

Out of the two, I prefer Rural Funds Group for its diverse portfolio, water assets and potential growth over the long-term.

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Motley Fool contributor Tristan Harrison owns shares in Rural Funds Group. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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