Market volatility – especially during recessions – tends to push investors toward safety and stability, rather than outright growth. With the stock market at its worst six months to start a year in decades, that’s where we find ourselves now. It’s tough, no doubt, but it creates opportunities in high-quality dividend-paying stocks that have stood the test of time.
Real estate investment trusts, or REITs, are clear favorites when it comes to earnings, as they pay out nearly all of their earnings to shareholders in the form of dividends. That means industry returns are high, but not all REITs are created equal. In this article, we’ll look at three REITs we love because they’ve proven their ability to not only pay dividends during recessions, but to keep them growing.
Move into the Essex Estate Trust
Our first stock is Essex Property Trust (ESS), a REIT that acquires, develops and manages multi-family properties in West Coast markets. Essex is a significant player in this market, operating 246 apartment communities which collectively contain around 60,000 apartments.
Founded in 1971, Essex generates approximately $1.6 billion in annual revenue and trades with a market capitalization of $18 billion. The trust has also paid growing dividends for 27 years, which is rare among REITs.
We like Essex because it has shown its ability to increase its dividend during recessions – as the last 27 years have contained some recessionary periods. We also believe that it has the capacity and the will to continue to increase it indefinitely.
REITs typically have payout ratios above 80% of earnings, but Essex’s payout ratio for this year is just over 60%. That’s up from the past 50 years, but still very low by REIT standards. Not only does this mean the dividend should be safe in just about any economic circumstance, it also means Essex should be able to increase its dividend for many years to come.
The average increase in payout over the past decade is just over 7% per year, and indeed, this year’s dividend is exactly double what it was 10 years ago. This type of payout growth also sets Essex apart from smaller REITs that either don’t increase their dividend or do so in token amounts simply to keep the streak alive.
We believe Essex has a modest growth outlook ahead from an earnings perspective, estimating just 1.5% from 2022 levels. This would make it difficult to continue the average increase of 7% or more. of the trust, so we don’t think that will be the case. However, the yield is solid at 3.4%, and again we think dividend safety is excellent with Essex.
A dose of real estate income
Our next stock is Realty Income (O), which advertises itself as the “Monthly Dividend Company”. While Realty is certainly not alone in paying monthly rather than quarterly dividends, it is certainly one of the larger stocks that does, which has some advantages for investors.
Realty Income is a REIT that owns over 6,500 long-term leased commercial properties. Realty Income focuses on stand-alone commercial properties, rather than malls or residential units. Despite the inherent cyclicality of this stock, Realty Income has managed to increase its monthly dividend for 26 consecutive years. Additionally, it has increased its dividend 109 times since its IPO, essentially increasing it every quarter.
Realty Income was founded in 1969 and went public in 1994. The trust generates approximately $3.1 billion in annual revenue and trades with a market capitalization of $41 billion, making it one of the largest Market REITs.
Realty Income’s yield today is very high at 4.7%, about triple the S&P 500, and relatively high by its own historical standards. Realty’s average increase over the past decade is over 5%, which is still good payout growth for a REIT.
The payout ratio for this year is 75%, which is about what you would expect from a REIT. We believe this means that Realty’s dividend is safe during this recession, or any subsequent recession, as the trust has proven to be extremely well managed over the years. We also expect annual earnings growth of 4% from 2022 levels, so there will likely be plenty of capital available to return to shareholders.
Trust Federal Real Estate Investing
Our final stock is Federal Realty (FRT), which is a retail REIT that owns, develops and operates high-quality properties in major coastal markets. The trust operates just over 100 different properties that contain over 3,000 tenants, 25 million square feet and 3,200 residential units. Federal Realty has managed to increase its dividend for an incredible 54 consecutive years, making it a dividend king and the only REIT on this prestigious list.
Founded in 1962, FRT produces approximately $1 billion in annual revenue and trades with a market capitalization of just over $8 billion.
Federal Realty has increased its dividend by approximately 4% per year over the past decade, and we expect similar growth in the future. Confidence suffered during the Covid-induced recession because retail tenants were forced to close. However, this appears to have been reversed and we expect 5% annual earnings growth going forward.
The current payout rate is 72%, which is quite sustainable for Federal Realty, and we note that the trust payout has never reached 100% during the Covid downturn, despite a significant drop in earnings. This highlights the trust’s ability to weather recessions, and is why we believe the dividend will not only be safe in the next recession, but will also continue to rise.
The trust is yielding 4.4% today, and with more than half a century of consecutive increases, Federal Realty is a top dividend-paying stock by any measure.
We believe the best way to weather tough market times is to focus on the long term. That means finding high-quality dividend stocks that are likely to continue to increase their payouts regardless of the economy, and we find Essex, Realty Income and Federal Realty to meet that bill.
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