Safestore Holdings (LSE:SAFE) has been growing its dividend by an average of 18.3% a year over the last decade. That’s why it’s one of the top-performing FTSE 250 stocks in terms of total shareholder return. In fact, investors who held onto their position during this time are now reaping an annual yield of more than 50% on their original investment!
Maintaining this level of monster dividend growth over the next decade will undoubtedly be harder. But with demand for self-storage across the UK and Europe on the rise, it may not be as impossible as many may think. That’s why I’ve already added this business to my income portfolio. And with shares still trading at a price-to-earnings (P/E) ratio of just 6.5, this passive income opportunity continues to look like a bargain, in my eyes.
Making an extra £100
Today, Safestore is paying a dividend per share of 30.3p. That means if I’m looking to bolster my annual income by £100, I’d need to buy around 330 shares. At today’s valuation, that roughly translates into an investment of £2,778.
Relatively speaking, that’s not a lot of money. But it’s still not the easiest lump sum to come across for most individuals. Fortunately, there’s more to Safestore’s dividend than meets the eye. As I’ve already alluded to, the group has a knack for hiking its shareholder rewards. In fact, payouts have been increased for 13 consecutive years so far, placing the firm on track to becoming a dividend aristocrat.
Assuming that this upward trend continues, investors may not need to acquire all 330 shares today to hit the £100 passive income threshold in the long run. Of course, it’s important to remember that dividends are never guaranteed. And while Safestore has delivered impressive results so far, that could end up changing in the future.
What to watch
The firm’s business model is fairly straightforward. It acquires and builds self-storage facilities across the UK and Europe and then leases them to individuals or small businesses. This effectively makes it a landlord with a steady stream of rental income arriving in its bank account each month from its long list of tenants.
This makes it a highly cash-generative business, which is one of the main factors that has contributed to the chunky dividends paid over the last decade. However, with interest rates on the rise, expanding its real estate portfolio could prove more challenging moving forward.
Buying and developing commercial property isn’t cheap. And even with its impressive cash generation, the firm has racked up around £795m of debt & equivalents on its balance sheet. The group’s assets still far outweigh its liabilities, so there doesn’t appear to be any immediate solvency concerns.
But growth will likely be more challenging if interest rates remain elevated for a prolonged period. Rental income could even suffer as small business customers seek to cut storage costs in response to the new macroeconomic environment.
Nevertheless, the demand for self-storage facilities continues to rise worldwide. And as the industry leader in the UK, this business looks like it could be a terrific source of passive income for years to come. At least, that’s what I think. I’d buy more if I had the cash to spare.
