Growing up brutally poor, I learned many valuable lessons about money.
One lesson is, it’s easy to take financial resources for granted… until those resources are suddenly absent.
That’s why it’s so vital to make sure that your financial resources are never depleted.
Trust me, depletion is not a place you ever want to know.
Well, toward that end, putting yourself in a position to live only off of interest, and never the principle itself, is about as close to it gets as a bulletproof way to avoid running out of money.
This is a key reason why I’m such a big fan of the dividend growth investing strategy, a long-term investment strategy that advocates buying and holding shares in high-quality companies paying out reliable, rising cash dividends to shareholders.
If you can live purely off of the reliable, rising cash dividends your stocks pay you, you have an excellent defense against any possibility of financial insolvency.
You can find hundreds of companies that pay reliable, rising dividends by looking over the Dividend Champions, Contenders, and Challengers list.
This list has invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
It takes a special kind of business to be able to generate the ever-higher profit necessary to sustain ever-larger cash payouts to shareholders, making the dividend growth investing strategy a great way to filter investments and approach the long-term process of building wealth and passive income through investing.
I’ve been using this strategy for myself over the last 15 years, which has resulted in the building of the FIRE Fund.
That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.
This passive dividend income has been enough to fund my life since I decided to quit my job and retire in my early 30s.
How exactly I was able to do that is detailed in my Early Retirement Blueprint.
All this said, the dividend growth investing strategy involves more than just investing in the right companies.
Investing at the right valuations is also crucial.
That’s because price tells you only what you pay, but value tells you what you actually get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Building a portfolio full of undervalued high-quality dividend growth stocks can lead to immense wealth and passive dividend income, as well as financial freedom and the all-important avoidance of financial insolvency.
But spotting undervaluation calls for an understanding of how valuation works in the first place.
Well, that’s where Lesson 11: Valuation comes in.
Written by fellow contributor Dave Van Knapp as part of an overarching series of “lessons” on dividend growth investing, it lays out the ins and outs of valuation and even provides a valuation guide for you to use on your own.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Invitation Homes Inc. (INVH)
Invitation Homes Inc. (INVH)Invitation Homes Inc. (INVH) is a real estate investment trust that owns and operates single-family homes for lease across the United States.
Founded in 2012, Invitation Homes is now a $19 billion (by market cap) real estate titan that employs roughly 1,500 people.
Invitation Homes owns approximately 85,000 homes which it offers for lease across more than 20 US markets.
The company’s property portfolio is somewhat concentrated on the Western US (40% of revenue), but Florida (32%), the Southeast US (18%), and Texas (6%) are also major areas of focus.
Average occupancy is at 97.2%.
Homeownership has long been considered to be a core aspect of the “American Dream”.
However, due to an ongoing shortage of new housing supply, which has helped to drive higher prices on single-family homes, housing affordability has become a painful sticking point for would-be buyers.
Estimates vary, but it’s clear the US is short millions of homes.
The population of the US has been steadily increasing for decades, and homebuilding has just not kept up with demand.
This started to become a serious issue around the time of the GFC, as a bubble then collapse in financing for real estate led to a structural slowdown in building activity.
Ensuing “NIMBYism”, red tape, and the pandemic only exacerbated the crisis.
It would take years of overbuilding from now in order to catch up to today’s demand, and that’s all while demand is simultaneously and continuously rising year after year.
This is why homeownership is simply out of reach for a certain cohort of Americans.
Well, Invitation Homes provides a solution to this problem.
The REIT offers spacious (averaging about 1,900 square feet) homes for rent in alluring neighborhoods across some of the most sought-after areas of the US (such as Phoenix and Tampa).
If a family wants a SFH (and not an apartment) but cannot afford to buy, renting is an affordable and attainable alternative to buying.
To put things in perspective, the company’s rental homes have an ~$1,100/month affordability advantage (i.e., the average cost of home ownership in excess of the cost of leasing, as weighted by the company’s markets as of March 2025).
That’s huge.
For many, it could be the difference between having shelter and not having shelter.
And shelter is a basic need, so there’s really not much of a choice there.
Moreover, having that shelter possess the form factor of a single-family home in a clean, safe, convenient neighborhood is something that has timeless curb appeal.
If one cannot own a piece of the “American Dream”, renting a piece of it is a sensible substitute.
This situation creates a steady stream of customers for Invitation Homes, as the company is supplying the market with much-needed affordable housing.
This favorable supply-demand setup on a basic need with eternal demand makes Invitation Homes one of the most attractive REITs to invest in over the long run.
And it’s why the company just keeps churning out more revenue and profit, leading to richer dividends for shareholders.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, the company has increased its dividend for nine consecutive years, dating back to its 2017 IPO and showing how committed the REIT has been to its dividend and the growth of it right from the start.
Its five-year dividend growth rate of 16.6% is very high for a REIT, but much of that was powered by a rapid expansion of the payout ratio (which had been coming off of a post-IPO low base).
More recent dividend growth has been in a high-single-digit range, which is more customary for a REIT like this.
It has been growing faster than a lot of multifamily REITs, though, given that favorable supply-demand backdrop in the SFH space (compared to more supply in multifamily).
That faster growth is offset by the stock’s lowish (for a REIT) yield of 3.8%.
This isn’t quite as high as some of the yields in the apartment REIT space, which is really the closest comp to Invitation Homes.
On the other hand, this near-4% yield blows away what the broader market offers and is 140 basis points higher than its own five-year average.
Since the IPO, this stock has commanded high multiples and a relatively low yield, but that has turned over the last year or so (which is why I’m featuring it today).
Based on midpoint guidance for this year’s Core FFO/share, the payout ratio is only 60.7%.
This is one of the healthier payout ratios in all of REITdom.
Solid numbers here right across the board, from the yield to the growth to the cushion.
Revenue and Earnings Growth
As solid as they are, though, these dividend metrics largely rely on past data.
However, investors must always be thinking about possible future results, as today’s capital is risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be useful when it comes time to estimate intrinsic value.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this way should give us what we need to start to draw conclusions about where the business may be going from here.
Invitation Homes grew its revenue from $1.1 billion in FY 2017 to $2.6 billion in FY 2024.
That’s a compound annual growth rate of 13.1%.
I usually show a decade’s worth of growth (using that as a proxy for the long term), but Invitation Homes only has a public history dating back to its 2017 IPO.
We can clearly see an impressive level of top-line growth here, especially for a REIT, but this result is also somewhat misleading.
When it comes to REITs, it’s imperative to look at profit growth on a per-share basis.
That’s because REITs use debt and equity to fund growth, as they’re legally required to distribute at least 90% of their taxable earnings to shareholders (often making REITs income plays suitable for income-seeking investors).
Because of the legal structure that forces payouts, limitations around internal funding for growth causes a tapping of equity (by issuing shares) and diluting shareholders.
Thus, you see common distortions between absolute revenue growth and profit growth relative to shares outstanding.
Also, when assessing profit for a REIT, we want to use funds from operations instead of normal earnings.
FFO (or adjusted FFO) is a measure of cash generated by a REIT, which adds depreciation and amortization expenses back to earnings.
Invitation Homes increased its FFO/share from $0.50 to $1.50 over this period, which is a CAGR of 17%.
This is pretty exceptional growth for a REIT.
REITs tend to be slow-growth income vehicles, so seeing high-teens bottom-line growth, even after dilution, is remarkable.
However, a lot of this was fueled by such a strong start out of the IPO gate.
If we zoom into more recent results, Invitation Homes put together 6.7% YOY growth in AFFO/share for FY 2024.
I think that number – call it a high-single-digit level – is a fairly appropriate level of growth for a REIT like this.
Looking forward, CFRA currently has no three-year EPS CAGR projection for Invitation Homes.
It seems that CFRA almost always excludes REITs from their forecasts, so this isn’t surprising.
Nonetheless, I think there’s enough to glean from recent results out of Invitation Homes.
The most recent fiscal year’s ~7% rise in YOY AFFO/share represents what I think is a good base case assumption around the REIT’s bottom-line growth profile over the coming years.
That would be faster growth than what you’re getting out of most multifamily REITs, which explains why this stock offers a slightly lower yield than what you can get from those quasi-competitors.
Now, CFRA does touch on the REIT’s slowing growth, noting: “We think continued revaluation of single-family homes-for-rent (SFHR) in 2025 as rental price power wanes, operating costs rise, and weaker economy hurts affordability.”
Hard to argue with these points, but we also have to remember that shelter is not a discretionary budget item.
We all have to live somewhere, so families are simply conducting a cost-benefit analysis between renting or buying their abode.
Now, a boom in multifamily supply over the last several years provides some optionality in this space, particularly if a household is flexible around space needs, and this has pressured near-term pricing power for the suppliers (including Invitation Homes).
But if a family is settled on a SFH – and most are – the affordability gap, as outlined earlier, is so severe that renting a home is almost a no-brainer decision right now.
Apartments tend to be a hard sell for a family, so the real competition for a rental home is a purchased home – but the latter has rarely been more expensive than the former on a relative basis than it is right now.
In addition, some people (including yours truly) simply prefer to rent their abode – a personal preference which stems from any myriad of reasons, including greater flexibility and lower responsibilities and time outlays regarding maintenance.
To me, Invitation Homes appears to be fully capable of continuing its recent MSD-HSD bottom-line growth trajectory, which would translate into similar dividend growth.
And shareholders would be getting that on top of the ~4% starting yield.
If one does favor yield/income a bit, it’s not a bad combination at all.
Financial Position
Moving over to the balance sheet, Invitation Homes has an okay financial position.
A common measure for a REIT’s financial position is the debt/EBITDA ratio, and I commonly see REITs range from 3 to 7 on this ratio (lower is better).
Invitation Homes has a net debt/adjusted EBITDAre ratio of 5.3.
Right about in the middle of the pack.
It’s worth noting Invitation Homes has no debt reaching final maturity until 2027.
The company carries approximately $8.3 billion in total net debt, which isn’t overly concerning against the size of the enterprise.
The REIT structure encourages and almost necessitates debt (because much of the cash flow gets returned to shareholders via large dividends), so it’s unsurprising to see Invitation Homes employing quite a bit of leverage.
REITs carrying leveraged balance sheets by design is a reason why I’m cautious around REITs, but shelter is one type of real estate that I’m quite enthusiastic about over the long term, and that allays some of my concerns in this case.
It’s hard to imagine any kind of future in which shelter becomes obsolete (which cannot always be said about other types of commercial real estate).
People will always need somewhere to live, and many (if not most) families prefer the form factor of a single-family detached home.
It’s a high degree of long-term resiliency and visibility.
Overall, there’s a lot to like about Invitation Homes, assuming one is open to investing in a REIT.
A structural shortage of homes in the US has led to very high home prices for buyers; with relatively more affordable SFHs for rent in appealing locations across the country, Invitation Homes is in the right place(s) at the right time.
And with economies of scale, an entrenched footprint in desirable locations, and favorable supply dynamics that further support demand, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Although direct competition is limited, homes available for purchase will always compete against the company’s rentals.
On the regulatory front, regulations across the housing industry are actually advantageous (because supply continues to be restricted).
A REIT’s capital structure relies on external funding for growth, which exposes the company to volatile capital markets (through equity issuances) and interest rates (through debt issuances).
Adding to the rate conversation, elevated rates can hurt this particular business model twice over: Debt becomes more expensive to take on and service, and equity can become more expensive (because income-sensitive investors have alternatives, which puts downward pressure on the stock price).
While Invitation Homes has leadership and scale, there are no high barriers to entry preventing competitors from replicating the business model by acquiring land/homes.
A large boost in the US housing supply could reduce demand for rental homes, although the housing shortage is currently large and structural in nature (meaning material changes to this situation would take years to play out).
Multifamily housing REITs have demonstrated long-term success in the market, but single-family homes for lease at scale is a business model that doesn’t have the same kind of proven track record.
There is some exposure to the economy, as rising unemployment in the company’s key markets would likely lead to less demand, lower rents, and higher vacancies.
Since Invitation Homes buys homes in order to grow its portfolio, the company is directly exposed to the US housing market (which can be quite volatile, even at local levels).
Quite a few of these risks are fairly standard for a REIT, but I’d argue that Invitation Homes is better than your standard REIT.
Yet, after a 30%+ drop from all-time highs, the valuation is currently well below its own standard…
Valuation
The stock is currently trading for a forward P/FFO ratio of 15.8, based on this year’s midpoint guidance for Core FFO/share.
That’s somewhat analogous to a P/E ratio on a normal stock, giving us some idea of just how undemanding the valuation has become here.
Another way to judge a REIT is by way of the cash flow multiple.
At a P/CF ratio of 16.5, which is well below its own five-year average of 21.3, the stock looks cheap both in absolute and relative terms.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 6.5%.
I’m basically extrapolating out recent bottom-line growth, which supports dividend growth, out into the future.
This seems like a very reasonable assumption to make regarding Invitation Homes, as the firm is advantageously positioned in a section of real estate that has favorable supply-demand characteristics which are firmly structural in nature.
If one wants to live in a home but cannot afford to buy (due to prices being historically high), there isn’t much of an alternative beyond renting a home (because shelter is a basic need).
There will be periods of above-trend growth followed by below-trend growth (we’re currently in a latter period), but I think a HSD type of growth rate is very achievable for Invitation Homes over time.
The DDM analysis gives me a fair value of $35.30.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
From my perspective, the stock looks attractively valued after a strong pullback that started in the spring.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates INVH as a 4-star stock, with a fair value estimate of $41.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates INVH as a 3-star “HOLD”, with a 12-month target price of $31.00.
I’m almost straight up the middle. Averaging the three numbers out gives us a final valuation of $35.77, which would indicate the stock is possibly 15% undervalued.
Bottom line: Invitation Homes Inc. (INVH) is a great real estate investment trust, favorably positioned in a section of the market that has a structural deficit of supply. Shelter is a basic need, and single-family homes in nice neighborhoods have timeless curb appeal.
The affordability advantage that rental homes offer families cannot be denied. With a market-beating yield, high-single-digit dividend growth, a reasonable payout ratio, nearly 10 consecutive years of dividend increases, and the potential that shares are 15% undervalued, long-term dividend growth investors looking for yield and exposure to the US housing market have low-hanging fruit in front of them.
-Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Note from D&I: How safe is INVH’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 60. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, INVH’s dividend appears Borderline Safe with a moderate risk of being cut. Learn more about Dividend Safety Scores here.
Source: Dividends & Income
Disclosure: I’m long INVH.
