While there are a lot of growth stocks in the FTSE 250, the index is also home to some terrific-income-focused opportunities. For example, Safestore Holding (LSE:SAFE) has been quietly hiking shareholder payouts for almost 15 years in a row by an average of 14.3% each time.
The self-storage operator doesn’t currently offer the most explosive yield. After all, a payout of 3.5% is pretty much on par with the FTSE 100 right now. But, providing the firm continues its track record of expanding shareholder payouts, that might change significantly in the long run. And with a price-to-earnings ratio of just 7.1, the shares look fairly cheap as well.
That’s why I’ve already added this business to my portfolio. But how much passive income could investors who are considering it potentially unlock long term?
Crunching the numbers
At a yield of 3.5%, I’d need to invest £2,860 to earn £100 in passive income annually. Looking at the current price that translates to buying 300 shares. But in the long run, I may not need to invest as much.
Let’s assume management can continue to expand shareholder payouts at the same average rate we’ve seen over the last decade-and-a-half. 10 years from now, the current 3.5% yield would grow to 13.3% on an initial cost basis.
With 300 shares, that’s an annual passive income of £345 – and that’s before even considering the extra income earned if dividends are reinvested along the way. Alternatively, suppose I only wanted to earn £100. In that case, this future growth trajectory indicates I’d only have to buy 87 shares today, costing roughly £750.
Of course, this all depends on Safestore maintaining its current dividend growth momentum. Is that likely to happen or is this all just wishful thinking?
Investigating the dividend growth opportunity
A big part of Safestore’s tremendous track record has been its rise to industry dominance. The company now controls the lion’s portion of market share within the UK. And while it continues to expand its territory, higher levels of competition mean that it’s somewhat dependent on the external growth of the self-storage industry.
That’s something management doesn’t have much control over. And it’s why the firm has begun expanding into new territories. With operations now popping up in the Benelux region of Europe, the company is seeking to replicate its UK success abroad.
Given that the European self-storage market is underdeveloped compared to Britain, Safestore appears to have a decent first-mover advantage. If successful, the growth seen to date could be just the tip of the iceberg. After all, Europe is a much larger market than the UK.
However, expanding into new territories also comes with quite a few hurdles to overcome. The lack of self-storage adoption means Safestore has quite a bit of customer education and awareness campaigns to execute.
Suppose it can’t boost European knowledge of its services without spending exorbitant sums of capital? In that case, international margins will be notably thinner. And since earnings drive dividends, maintaining future payout growth is likely to be harder.
Nevertheless, this isn’t Safestore’s first rodeo. 15 years ago, low self-storage awareness was a problem in the UK. And one that management was able to overcome. That’s why, despite the challenges, I remain cautiously optimistic for the long run.
