Better Dividend Stock: Equity LifeStyle Properties vs. Sun Communities

Going off the beaten path to focus on an underappreciated niche market can be a rewarding investment strategy. For example, manufactured home communities have quietly been one of the most resilient property classes to invest in over the decades. They benefit from durable demand due to housing affordability issues and the expense of moving a manufactured home out of a community.

Sun Communities (NYSE: SUI) and Equity LifeStyle Properties (NYSE: ELS) are leaders in owning manufactured home communities and other niche property types. That strategy has enabled these real estate investment trusts (REITs) to pay attractive dividends that have grown over the years. Here's a look at which of these residential REITs is the better buy for dividend income right now.

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Leaders in owning resilient real estate

Sun Communities is the largest publicly traded owner and operator of manufactured housing communities (288 properties with 97,000 sites), RV communities (179 best-in-class locations with 59,000 sites, including 34,000 annual sites), and marinas (138 locations with 49,000 wet slips and dry storage spaces). It's also the second largest owner/operator of U.K. holiday parks (54 parks with 18,000 manufactured home sites and 4,000 transient sites). Overall, it has about 660 developed properties with over 179,100 developed sites (plus the nearly 49,000 marina slips/spaces) across the U.S., Canada, and U.K.

Equity LifeStyle has a slightly smaller portfolio. The REIT has over 450 properties across 35 states and one Canadian province with more than 172,850 sites. Its portfolio features 203 manufactured home communities with 75,000 sites, 226 RV resorts and campgrounds with 91,000 sites (including 34,000 annual), and 23 marinas with 6,900 slips.

These niche properties produce very resilient net operating income (NOI). For example, since 1998, Equity LifeStyle has grown its same-property NOI by an average of 4.4% per year. That's higher than the REIT sector average (3.3%) because its properties have performed much better during recessionary periods (it has never posted a quarter of negative NOI growth).

Sun Communities has delivered similar income stability. Since 2000, the REIT has grown its same-property NOI at a 5.2% compound annual rate (faster than the REIT sector's 3.2% average). It has recorded positive NOI growth every individual year and rolling four-quarter period over the past two decades.

Digging into their dividends

The stable income generated by these REITs enables them to pay higher-yielding dividends. Equity LifeStyle currently yields 2.8%, while Sun Communities' dividend is around 3%. Those payouts are more than double the S&P 500's dividend yield of 1.2%.

Sun Communities currently pays a quarterly dividend of $0.94 per share ($3.76 annually). It expected to generate between $6.76 and $6.84 per share of core funds from operations (FFO) last year. That puts its dividend payout ratio at around 55%, a very conservative level for a REIT. Meanwhile, Equity LifeStyle paid $1.91 per share in dividends last year while reporting $2.91 per share of normalized FFO. That puts its payout ratio at around 65%.

Equity LifeStyle recently increased its dividend again, giving its investors a 7.9% raise compared to last year's payment level. Sun Communities last raised its dividend in February, giving its investors a modest 1.1% pay bump. That continued Equity LifeStyle's trend of delivering much faster dividend growth compared to its peer:

ELS Dividend data by YCharts.

Equity LifeStyle and Sun Communities both have investment-grade balance sheets. However, Equity LifeStyle has better financial metrics. It currently has a low 4.6 times leverage ratio compared to Sun Communities' 6.0 times level. That gives it more financial flexibility to expand its portfolio and grow its dividend.

In a stronger position to grow

Sun Communities currently has a higher dividend yield (backed by a slightly lower payout ratio). However, Equity LifeStyle has a stronger balance sheet, which has enabled it to grow its dividend much faster than its peer. Because of that, it's the better dividend stock to buy for the long term right now. It should be able to produce higher total returns and potentially more income over the long haul as it continues growing its payout at a faster pace.

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Matt DiLallo has positions in Sun Communities. The Motley Fool recommends Sun Communities. The Motley Fool has a disclosure policy.