Investing money in dividend-paying stocks is a fantastic and proven strategy for unlocking a chunky passive income. But a common trap investors often stumble into is chasing the highest yields to try and earn the biggest payout.
The only problem is, most high-yield stocks often later announce a dividend cut, leaving investors sorely disappointed.
Instead, smarter investors focus on the companies that can not only sustain dividends today but also grow them in the future. And it’s how a £20,000 initial investment in Safestore (LSE:SAFE) 15 years ago is now yielding almost 25% — a payout that’s still growing today!
However, suppose investors chose to reinvest their earnings along the way? In that case, the passive income generated from this investment is even higher at roughly £7,500 a year. And that initial £20,000? Well, that’s grown to around £165,000.
The question now is, can it do it again?
Just getting warmed up
With a market-cap of £1.4bn, the prospect of Safestore shares delivering another 725% total return may sound unrealistic. Even more so right now, given the ongoing cyclical downturn within the self-storage market. Yet, despite its larger size, the company does have a plausible path to success over the next 15 years.
Specifically because, until now, most of its earnings have been concentrated within the borders of Britain. But over the last few years, management’s been ramping up its expansion into Europe. And based on the latest analyst forecasts, the European self-storage market could reach up to $27bn (£20bn) over the next eight years alone.
That’s roughly 10 times the UK’s market size. And while Safestore’s hardly the only business seeking to capitalise on this growth opportunity, if management’s able to replicate its historical success, the growth and dividends seen so far might be just the tip of the iceberg.
What could go wrong?
This growth potential’s undoubtedly exciting. But like all investments, there are risks to consider. Self-storage adoption in Europe is much lower compared to the UK, making market penetration a much harder task.
At the same time, there’s no unified EU planning code for self-storage providers. The regulatory requirements vary from country to country, and sometimes even city to city, creating a lot of legal hoops for Safestore to jump through, slowing the process.
But even if management’s able to flawlessly execute its long-term vision, the last few years have perfectly highlighted the impact of higher interest rates. Don’t forget that a key driver of self-storage demand is home renovation and moving house.
When rates are high, activity in the property sector wanes and growth becomes far more of a challenge. And while the current cycle seems to be slowly ramping back up, 15 years is plenty of time for another downturn to materialise, potentially leaving investors disappointed with the final result.
The bottom line
Is Safestore a guaranteed winner? Of course not, no investment ever is. But there’s enough growth potential and financial flexibility to make it a strong contender, in my opinion. And with the shares currently offering a solid 4.7% yield to start, investors may want to consider taking a closer look.
Of course, there are other passive income opportunities to explore today as well.
