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Last week, I wrote about Rexford Industrial Realty (REXR) as my top dividend stock to buy in February.

There’s a lot to like about this company. But over the past few days, I’ve been thinking more deeply about its strengths, its risks, and—interestingly—how they may be one and the same.

So today, I want to take you through some of the key questions I’ve been mulling over: What are Rexford’s biggest strengths and risks? And why might the very thing that makes this company so successful also be its Achilles’ heel?

For starters, Rexford is an industrial REIT focused exclusively on Southern California—a region with severe supply constraints, high demand, and limited new development opportunities.

Unlike other industrial REITs that are more geographically diversified—like Prologis (PLD), for example—Rexford has laser-focused expertise in this one region, and so far, that strategy has paid off.

Also, the scarcity of industrial land in Southern California creates strong pricing power for landlords in the area. California's strict zoning laws and regulations make it difficult to build new industrial real estate—and make it less enticing for new competitors to enter the market—which only amplifies the demand for existing properties and limits competition for landlords already operating in the region.

On top of that, the nearby Ports of Los Angeles and Long Beach handle nearly 40% of all U.S. containerized imports, making Southern California one of the most important logistics hubs in the world.

And with major highways and rail networks providing easy access to the Western U.S., demand for industrial real estate in this area remains very strong.

So far, everything about Rexford’s business model seems great—and it is. But in the spirit of Charlie Munger, it’s important to flip the problem on its head and invert.

Instead of only looking at what’s going right with Rexford, we also need to consider what could go wrong. In fact, that’s probably more important. We need to understand the risks and the probability that things don't work out in our favor.

Could shifts in global trade patterns reduce the competitive advantage of the ports in LA and Long Beach? I mean, it’s hard to imagine Southern California not being a focal point for shipping and logistics, but some trends could reduce the importance of its ports over time.

For example, the expansion of East Coast and Gulf Coast ports via the Panama Canal allows some shipments to bypass LA and Long Beach entirely. Mexico is also investing in its ports, which could potentially shift some cargo away from California.

Also, it's no surprise that California’s regulatory environment is only getting more complex, with stricter environmental laws and pro-tenant policies that could make it harder for landlords to raise rents or operate effectively enough to stay profitable.

As a result, businesses have been leaving the state for years, favoring lower-cost locations like Texas, Arizona, or Nevada.

Still, that doesn’t mean Southern California won’t continue to be one of the most important logistics hubs in the country. Even with businesses establishing their headquarters elsewhere, I think industrial real estate demand should still be pretty strong.

Then there’s the issue of natural disasters. California isn’t just expensive and ripe with regulation—it’s also prone to earthquakes and wildfires, as we’ve unfortunately seen quite recently.

So, with all of that said, where does that leave us?

The way I see it, the same things that make Rexford one of the most successful industrial REITs on the market—namely, its geographic focus—are also its biggest risks.

If you think Southern California will remain one of the most important logistics hubs in the U.S. for the foreseeable future, Rexford looks like a really solid long-term investment, especially at current prices.

But if you think shifting trade patterns or the difficulties of doing business in California will drive tenants elsewhere, maybe something like Prologis (PLD), which has a much more geographically diversified portfolio, would be more up your alley.

Speaking personally, I don’t exactly know how I’ll proceed with this company. It'll stay on my watchlist for now, but these are the questions I’ll be keeping in mind as I think about it going forward.

Having said that, now I want to hear from you: What do you think? Is Rexford a worthy investment despite the risks? Write to me here and let me know.

And if you want to learn more about Rexford, as well as two other deeply discounted dividend stocks, check out this video here.

Dividend Investing Democratized

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IN MY PORTFOLIO 📈

*Portfolio performance provided by* ***Snowball Analytics***

PURCHASES

JNJ - 0.79 shares @ $151.59
SCHD - 4.73 shares @ $27.47

DIVIDENDS

LOW - $18.85

Weekly Total: $18.85

Monthly Total: $18.85

Annual Total: $281.29

ICYMI 🎥

Reacting To Subscriber Dividend Portfolios | 18 Years Old With CRAZY RISK

In this video, we'll take a look at three different dividend portfolios, and I’ll give my honest thoughts on what I like about them, as well as what I think could be improved.

WATCH THE VIDEO

CAREFULLY CURATED 🔍

📺 Timeless Wealth Principles - My good friend, Nolan Gouveia, hit the nail right on the head with these six timeless principles that are essential for building lasting wealth.

🎧 The Journey To Financial Independence - Speaking of timeless principles, Stig Brodersen shares many in this episode of We Study Billionaires, where he shares his journey to financial freedom.

📚 Don't Stress - Morgan Housel argues that as society solves major issues, we tend to start stressing about smaller ones. In other words, we find new, unimportant things to worry about, suggesting that the need to stress about something is a constant in human nature.

SINCE YOU ASKED 💬

"Is 1% not a terrible dividend?"

- Van Bacon | YouTube

I'll admit, a 1% dividend yield on its own isn’t all too exciting, but a stock's dividend yield is just one piece of the puzzle. There are a plethora of other factors that you need to consider to determine whether a stock is a good investment.

For example, what do the company’s financials look like? If the growth metrics resemble those in the Snapstock chart below, would you still consider the stock to be a poor investment?

Then there’s the matter of dividend growth. If the company’s dividend is only increasing at a low or mid-single-digit rate, I can understand why you may not be that interested in it—especially if your goal is to eventually live off your dividend income.

But what if the dividend growth CAGR was much higher, like 17% per year, as in the chart below? Would a 1% starting yield be a deal breaker for you?

With that level of dividend growth, your yield on cost would increase substantially over time:

After 5 years: 2.19%
After 10 years: 4.81%
After 20 years: 23.11%

As you can see, the longer you hold, the better your cash flow return becomes. And that’s just one side of the equation.

When you consider that share prices tend to follow the trajectory of earnings and free cash flow over the long term, a company with strong financial growth and aggressively growing dividends is also likely to see meaningful share price appreciation.

All of this is to reiterate that you can't judge a stock purely by its starting dividend yield. While a 1% yield might not seem exciting at first glance, a combination of strong, growing financials and aggressive dividend growth can still make the investment a highly rewarding one over time.

Have a question? Ask me here to see it featured in an upcoming newsletter.

LAST WORD 👋

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