DYT simply says that for stable businesses like REITs and most dividend stocks (growth rates are stable over time), yields are mean reverting. This means they cycle around a relatively fixed point that approximates fair value. A stock that normally yields 4% over time that is now yielding 5% is 20% undervalued ((5%-4%)/5%). Or to put another way, such as stock would need to rise 25% (upside to fair value yield) in order to return to its historical norm. As long as the fundamentals don’t break (business model deteriorates) nearly all dividend stocks eventually (usually within a few years) return to their fair value yield. This means that share prices rise faster than cash flow and dividends, boosting your total return to: yield + cash flow/dividend growth rate + valuation boost (annualized over how long it takes to get back to fair value).

This is called the valuation-adjusted Gordon Dividend Growth model and has been relatively accurate in predicting dividend stock total returns since 1966 (52 years).  

  • Yield: 7.9%
  • 5 Year Average Yield: 4.3%
  • 13 Year Median Yield: 4.8%
  • Estimated Fair Value Yield: 4.6%
  • Discount To Fair Value: 42%
  • Upside To Fair Value: 72%
  • 10 Year CAGR Valuation Boost: 5.6%
  • Long-Term CAGR Total Return Expected: 7.9% Yield + 4.3% FFO/Dividend Growth + 5.6% valuation boost = 17.8%

Thanks to the perfect storm of short-term negative factors Kite’s yield is 72% above its fair value yield. I find that by taking the midpoint of its five-year average and 13-year median yield.

This allows us to estimate what the yield returns to if the turnaround is successful and the market stops hating the stock (market can’t ignore strong and rising fundamentals forever). This means that Kite is about 42% undervalued today, and the share price can be expected to outpace FFO/share and dividend growth by 72% over time. I can’t tell you how long that will take, but it’s almost certain to happen within the next five years. For my return model, I use 10 years. Even over this prolonged period, that means that Kite shares will likely outpace cash flow and dividend growth by 5.6% on an annualized basis. Combine that with the current yield and that’s how you get to an expected CAGR total return of nearly 18% over the next decade. Or to put another way, buying Kite today means that by the end of 2028 you could be looking at a 415% total return. All while enjoying market-beating returns from its generous dividends alone (S&P 500 is likely to deliver far less than 8% CAGR total returns over the next 10 years according to Morningstar, BlackRock, and Vanguard).

But as great a high-yield dividend growth investment as Kite is today, that’s only if you’re comfortable with the risk profile.

Risks To Keep In Mind

There are several risks potential Kite investors need to be aware of before buying this stock. First, is the fact that this small REIT, while possessing strong fundaments, is NOT yet a blue chip. Specifially, to attain the famous sleep well at night or SWAN status (in which dividend cuts even during very severe recessions are unlikely) it will have to continue deleveraging its balance sheet.


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