Are You Missing Out on This Passive Income Stock’s Monster Dividend Raise?

For any publicly traded company, the combination of improving fundamentals and a substantial dividend raise can really provide a lift to its stock. Such a happy development occurred at the tail end of 2023 with specialty real estate investment trust (REIT) RLJ Lodging Trust (RLJ -1.55%), and the shares have generally been on quite a tear since then.
Of those two drivers, it might have been the dividend raise that provided the most lift — after all, in percentage terms it came in at 25%. Not all dividends are created equal, however, so let’s take a peek at this one to see if it helps make RLJ a worthy stock investment.
An operator of familiar hotel brands
Despite that eye-catching dividend raise, RLJ isn’t a household name with the public. The company’s specialty is the operation of hotels that, in its words, comprise “premium-branded, rooms-oriented, high-margin, focused-service and compact full-service,” lodgings.
Its portfolio consists of 96 hotels these days, for a total of around 21,200 rooms. These facilities are scattered around the U.S. in 23 states plus the District of Columbia, and most are operated under franchise agreements.
RLJ as a brand might not ring a bell, but even the most casual travelers will be familiar with the hotel names the company operates. Its portfolio is a mix of these brands, which essentially comprise offshoots from top corporate innkeepers Hyatt Hotels (Hyatt Place), Marriott International (Courtyard by Marriott), and Hilton Hotels (Hilton Garden Inn and Embassy Suites).

Travel continues to be a popular activity — it roared back to life after the coronavirus pandemic waned and hasn’t yet slowed meaningfully.
However, according to the latest statistics from the U.S. Travel Association, not every nook and cranny in the industry is benefiting. Travel spending in this country rose by 3.5% year over year in the first nine months of 2023, but September saw the fifth straight month of flat growth for hotels. At least some of this can be attributed to the enduring popularity of DIY lodging providers, an ambitious group led by Airbnb.
A dividend raise doesn’t automatically make a stock appealing
To its credit, RLJ has managed to squeeze out some growth despite the recent stagnation of its native segment. In that aforementioned January-September 2023 period, the REIT lifted its total revenue nearly 13% higher (to just over $1 billion). Comparable revenue per available room (RevPAR), a closely watched metric in the hospitality industry, advanced by 10% on overall occupancy that rose to 72.6% from 69.5%.
So perhaps the anticipation of such growth gave RLJ the confidence to boost its quarterly payout (the hike was, after all, announced prior to the third-quarter earnings release). That 25% dividend raise equates to $0.02 per share, for a fresh total of $0.10. This was paid in mid-October of last year.
How much does said dividend raise add to the attractiveness of RLJ’s shares? Honestly, not all that much.
The run-up in the stock price has reduced RLJ’s dividend yield to the point where it hovers just under 3.4%. That’s fairly low in the world of REITs, which are required to pay out at least 90% of their net income in the form of shareholder dividends. These days it’s not hard to find REITs yielding at least 5%. Even if RLJ were to keep declaring double-digit dividend raises, it might have trouble competing with such numbers.
The right kind of REIT?
I also don’t feel that hotels are the most high-potential type of properties in the REIT sphere (even though RLJ has done a decent job growing its business in spite of this). Again, persistent competition from Airbnb and its ilk has leeched their popularity, and I’m not seeing any of the major brands doing an awful lot to compete better. For me, top retail and data center specialty REITs have more potential.
So ultimately, while RLJ’s big boost is impressive on its face, personally it’s not moving me enough to buy the stock.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb. The Motley Fool recommends Hyatt Hotels and Marriott International. The Motley Fool has a disclosure policy.

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