This Dividend Aristocrat Is the 'REIT' Choice Right Now

After a punishing March, the U.S. stock market has shown signs of life in April. The past few weeks have seen a surprising rally in the S&P 500 index, which could lure buyers back in who might think the worst is over. But while the recent upturn in stock prices is reassuring, investors should continue to focus on the highest-quality stocks, particularly when it comes to the hardest-hit sectors. For example, real estate investment trusts are still in distress, especially those in the retail industry. Retail real estate was challenged even before the coronavirus crisis, due to the deterioration of mall traffic brought on by e-commerce retailers such as Amazon . The coronavirus has caused lockdowns of many states across the U.S., putting even further stress on retail stores and the REITs that own the properties. So, investors need to tread carefully when it comes to REITs. One of the select few REITs we continue to recommend, even now, however, is Realty Income . Realty Income has a high dividend yield above 5%. More importantly, a long history of surviving recession and a strong property portfolio that should keep the dividend sustainable, even in a recession. Avoiding the Hard 'Realty' of the Industry Many occupants of traditional commercial real estate properties, such as restaurants and retailers, are simply going to go out of business due to the coronavirus. Reports have indicated J.C. Penney is the latest to consider bankruptcy as its traffic dwindles. J.C. Penney this week even entered a 30-day grace period on making approximately $12 million in interest payments on senior notes, according to Bloomberg. It is never a good sign when a company misses an interest payment, as it indicates severe financial distress. Naturally, the carnage is hitting the owners of these properties as well. Retail REITs have been hammered in the stock market collapse to start 2020. The recent upturn in the stock market is a promising sign, but investors should resist the urge to catch falling knives in the REIT asset class. Instead, investors should continue to focus on quality, and that brings us to Realty Income, one of the best operators among all REITs. Realty Income has a highly diversified portfolio, consisting of over 6,400 properties in 49 U.S. states, Puerto Rico and the United Kingdom. Its portfolio encompasses 50 industry groups with over 300 commercial tenants. It enjoys a high occupancy rate of 98.6%. Importantly, many of its top tenants are in necessary areas such as pharmacy and grocery, which are allowed to remain open during the coronavirus lockdowns. Among its top tenants are Walgreens , Dollar General , Dollar Tree , and Walmart . Realty Income utilizes the triple-net structure, which is advantageous for the REIT. Under this structure, tenants are responsible for the operating expenses of the property, including taxes, maintenance, and insurance, in addition to monthly rent payments. This lease structure reduces Realty Income's exposure to rising property operating expenses, while providing the company with a steady and predictable stream of cash flow, which it can use to pay dividends to shareholders. Of course, this advantageous structure is of little consolation if the underlying tenant is going out of business. Mall-based REITs have been hit extremely hard due to the coronavirus, and the outlook remains highly uncertain. Even when nationwide lockdowns are lifted, it is difficult to envision mall traffic returning to pre-crisis levels. As mentioned previously, malls were already in trouble even before the coronavirus, due to the explosive growth of e-commerce retail. It is highly likely consumers will continue to opt for online shopping, even if and when retail stores and malls re-open. Realty Income's diversified portfolio, its focus on high-quality tenants, and its proven track record of navigating industry downturns is an indication that the company will survive the coronavirus crisis as well. Realty Income also has a long history of delivering steady dividends to shareholders, even in challenging environments. Realty Income has a dividend track record that is virtually unparalleled among REITs. The company has paid 598 consecutive monthly dividends to shareholders, totaling nearly 50 years of uninterrupted payouts. It also raises its dividend with regularity. Realty Income has grown its annualized dividend payout by a compound annual rate of 4.5% since its initial listing on the New York Stock Exchange in 1994. The company has increased its dividend for over 25 years in a row, qualifying it on the list of Dividend Aristocrats, a select group of just 66 stocks in the S&P 500 that have raised their dividends for at least 25 consecutive years. At current share prices, Realty Income has a 5.5% dividend yield. This is a highly attractive yield, considering the S&P 500 yields just over 2% on average right now. And while Realty Income is not the highest yielding REIT around, it offers sustainable dividends, which is especially important in this highly uncertain environment. Investors should know that while certain REITs are yielding in excess of 10%, many of these extreme high-yielders are not sustainable. Realty Income, meanwhile, continues to pay its dividend through the coronavirus crisis. The company recently declared its monthly dividend, and also drew $1.2 billion on its revolving credit facility to provide it with the liquidity to get through the downturn. To be sure, Realty Income is not immune from a recession. The company's FFO will likely decline in 2020, although it should avoid the widespread closures that threaten the very viability of lesser-quality retail REITs. Realty Income should be able to pay its dividend, even if the U.S. is about to enter a deep recession. This makes Realty Income one of the top picks today in the REIT space. (Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells it? Learn more now.)

This Dividend Aristocrat Is the 'REIT' Choice Right Now

Realty Income isn't the highest yielding REIT around, but it offers sustainable dividends, and here's why.

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