Finally, Public Storage's current dividend yield of 3.3% isn't exactly low, but is significantly lower than many other REITs. However, keep in mind that the company has done an excellent job of increasing its dividend. In fact, over the past 10 years, the dividend has increased by an average of 12% per year -- which should help income-seeking investors keep up with inflation and then some.
A word about valuation
Now, when buying a stock for the long term, a stock's current valuation should be a secondary concern, as the potential over the next several decades is much more important. However, it's worth mentioning because investors may be turned off by Public Storage's valuation.
The best way to assess a REIT's earnings is with its Funds From Operation, or FFO, so the price-to-FFO ratio is a good metric for comparing REITs. If you annualize Public Storage's latest FFO ($2.15 per share in the second quarter), its P/FFO of 24.2 seems to be rather expensive when compared to peers, which are generally in the 17-20 range right now.
However, make sure you consider the big picture. First of all, with the strong long-term potential, high profit margins, and history of stability and outperformance, I feel that Public Storage deserves a premium valuation. Since Public Storage has virtually no debt (peers average around 40% debt-to-capitalization), the company's reduced vulnerability to recessions as well as its superior financial flexibility also warrant consideration.
So, although shares trade for a lofty valuation, I feel that they are still fairly priced given these factors.
Beware of the risks
While I certainly feel like Public Storage has an exceptional risk/reward profile, that doesn't mean there aren't risks to consider. For example, although the self-storage industry has historically been less vulnerable to declining occupancy and defaults than other types of real estate, that is still a significant risk -- especially with occupancy rates as high as they are. A U.S. market crash could certainly cause a wave of defaults and vacancies, and erode the company's profit margins.
While Public Storage doesn't have interest rate risk in the sense that it depends on low-interest financing, higher interest rates are bad for REITs as a whole. Essentially, if the Federal Reserve decides to raise rates, it can make other income investments like bonds more attractive to investors, which can create selling pressure on "riskier" investments like REITs.
The Foolish bottom line
While there are indeed some risks associated with Public Storage, the favorable industry trends, and the company's history of responsible shareholder-friendly management makes Public Storage a smart investment you could hold onto forever.
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The article Public Storage: A Dividend Stock for the Next 50 Years originally appeared on Fool.com.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amerco. Try any of our Foolish newsletter services free for 30 days . 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 .
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