E-commerce is big business, and it’s getting bigger each year.

U.S. e-commerce sales grew 14.6% to $341.7 billion in 2015, according to the U.S. Commerce Department. U.S. e-commerce sales are expected to grow at or near a double-digit average annual rate into the next decade, so Forrest Research projects.

[ad#Google Adsense 336×280-IA]E-commerce is an obvious growth sector, and the growth is widely dispersed.

To be sure, Amazon.com (NASDAQ: AMZN), Alibaba (NYSE: BABA), eBay (NASDAQ: EBAY), Jet.com, and other dedicated e-commerce companies drive growth.

But everyone wants an e-commerce presence, be it retail, wholesale, or commercial.

If you’re a growth investor, this is all good news.

But what if you’re an income investor? Amazon.com, Alibaba, eBay, or most other dedicated e-commerce companies won’t issue a dividend anytime soon.

A Way to Exploit E-Commerce Growth

That said, there is a way for income investors to exploit the growth opportunities in e-commerce: industrial warehouses.

As e-commerce companies grow, their need for warehousing and multiple distribution centers grows as well. Growth has been impressive.

Thirty-eight U.S. markets saw over 1 million square feet of warehouse absorption during the second quarter 2016, with 11 markets experiencing over two million square feet of quarterly net occupancy growth, according to Cushman and Wakefield. This marked 25-consecutive quarters of net occupancy gains for the sector.

A sound industrial warehouse REIT is the obvious play on e-commerce growth for income investors. STAG Industrial (NYSE: STAG) is one of the better plays. STAG pays a dividend that yields 6.3%. What’s more, that dividend is paid in monthly increments and has grown at a 6% average annual rate over the past five years.

Like the many e-commerce companies that comprise STAG’s client base, STAG Industrial has been in growth mode. Since its 2011 IPO, its portfolio has grown 313% to 290 properties spread across 38 states.

The majority of STAG Industrial’s properties – 87% – focus on warehouse or distribution. Another 10% are leased to light manufacturing tenants. Most of the properties – 65% – are located in secondary markets (those outside New York, Chicago, Los Angeles, and other major metropolitan areas).

Warehouses and distribution centers tend to be large properties. STAG Industrial’s average building size is around 188,000 square feet. This ranks STAG Industrial second in terms of average building size in the industrial REIT sector. Just as important, most of the available square footage is taken. STAG’s occupancy rate – at 96.4% – is near the top of the heap.

The opportunity for more growth is certainly there. The market for warehouses and distribution centers is valued at over $1 trillion. STAG’s target asset class tends to be locally or regionally owned. Industrial property ownership is fragmented with the largest owner controlling less than 3% of the market. There is plenty of opportunity for additional growth through consolidation.

STAG Industrial: Smart Growth

I like growth – organic or acquired – as much as the next investor, but only if it’s smart growth. Growth matters only if returns on invested capital are maintained, or better yet, raised. STAG Industrial has proven it can grow and improve returns simultaneously.

In the third quarter of 2016, STAG acquired 13 properties for $166 million and a weighted average cap rate of 7.9%. The implied cap rate on STAG’s entire portfolio is 7.8%, which is over two percentage points higher than the peer average of 5.7%. The needle is certainly moving in the right direction.

But with REITs, cash flow matters most, and cash flow is reflected in funds from operations (FFO). This is the most important metric for REIT investors. FFO is the cash that covers the all-important dividend.

For the second quarter 2016, STAG’s FFO posted at $0.38, an increase of 5.6% compared to the second quarter ended June 30, 2015. For the six months ended June 30, 2016, FFO increased 13.5% compared to the same period last year. In other words, the $1.39-per-share annual dividend is sufficiently covered by FFO.

So, yes, income investors can exploit the growth opportunities in e-commerce. Better yet, STAG Industrial proves that they need not sacrifice current income to do so.

— Steve Mauzy

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Source: Wyatt Investment Research