The Best of The Best Monthly Dividend Stocks: Stag Industrial Inc (STAG)

What Are the Risks?

I would be remiss if I failed to discuss the possible risks of an investment in STAG. STAG is a solid company with a strong management team but there are external risks that could impact an investment in STAG.

The first risk is the potential for interest rates to rise significantly. STAG is primarily an income investment; slow growth with a significant dividend yield. It therefore falls into the category of bond surrogate and will likely see its share price fall if interest rates begin to rise.

Because STAG is able and expected to grow along with the economy, a fall in STAG’s valuation due to rising interest rates would likely be temporary. The second impact of a rising rate environment would be an increase in STAG’s borrowing costs to continue to grow its real estate footprint.

STAG does have an advantage over some of its peers in that STAG maintains an investment grade credit rating giving STAG access to lower loan and bond issue rates. But, STAG’s cost of growth capital would go up in a rising rate environment.

All that said, I don’t expect the US Federal Reserve will make any significant move to raise interest rates.  It is an election year, the US economy is soft, the employment metrics have turned down over the last couple of months, and the rest of the world is still trying to juice their economies via loose monetary policy.

The second risk would be a general economic slump or recession in the US.  An economic downturn would negatively impact many of STAG’s tenants and STAG’s revenue and earnings would likely be adversely impacted. STAG is not a recession-proof stock.  I’m not expecting to see a recession or significant economic downturn in the US.

My expectation is for more of the same low interest rate and slow grow environment that we have had over the last few years. I found the latest retail sales numbers promising with respect to STAG’s continued growth. Retail sales were up but the real story was that retail store sales were down 3.1% while retail non-store sales were up 8.1%.

In order for those non-store sales to get from the seller to the buyer quickly, sellers need to have regional warehouses and distribution centers. Just the type of facility Stag Industrial Inc (NYSE:STAG) owns. My bottom line is that I’m not expecting a general business downturn in the near term that would impact STAG’s operations.

Disclosure: This article is originally published on Sure Dividend by Dirk S. Leach.