Market volatility -- particularly during recessions -- tends to push investors toward safety and stability, rather than outright growth. With the stock market off to its worst six months to start a year in decades, this is where we find ourselves now. It's tough, no doubt about it, but it creates opportunities in high-quality dividend stocks that have stood the test of time.
Real estate investment trusts, or REITs, are obvious income favorites, because they pay substantially all of their earnings to shareholders via dividends. This means yields in the sector are high, but not all REITs are created equal. In this article, we'll take a look at three REITs we like because they have proven the ability to not only pay dividends through recessions, but continue to grow them as well.
Move Into Essex Property Trust
Our first stock is Essex Property Trust (ESS) , a REIT that acquires, develops, and manages multifamily properties in the West Coast markets. Essex is a sizable player in this market, operating 246 apartment communities that collectively contain about 60,000 apartment units.
Founded in 1971, Essex generates about $1.6 billion in annual revenue, and trades with a market cap of $18 billion. The trust has also paid rising dividends for 27 years, which is rare among REITs.
We like Essex because it has shown the ability to raise its dividend during recessions -- as the past 27 years has contained a few recessionary periods. We also believe it has the ability and willingness to continue to raise it indefinitely.
REITs generally have payout ratios in excess of 80% of earnings, but Essex's payout ratio for this year is just over 60%. That's up from the high-50s in years past, but still very low by REIT standards. Not only does this mean the dividend should be safe in just about any economic circumstance, but it also means Essex should be able to raise its dividend for many years to come.
The average increase in the payout in the past decade is just over 7% annually, and indeed, the dividend for this year is exactly double what it was 10 years ago. That kind of growth in the payout also sets Essex apart from lesser REITs that either don't raise their dividend, or do so in token amounts simply to keep the streak alive.
We think Essex has modest growth prospects in front of it from an earnings perspective, estimating just 1.5% from 2022 levels. That would make a continuation of the trust's 7% or more average increase difficult to sustain, so we don't believe it will. However, the yield is strong at 3.4%, and again, we believe dividend safety is excellent with Essex.
A Dose of Realty Income
Our next stock is Realty Income (O) , which bills itself as the "Monthly Dividend Company." While Realty is certainly not alone in paying monthly dividends rather than quarterly, it is definitely one of the larger stocks that does so, which has certain advantages for investors.
Realty Income is a REIT that owns over 6,500 long-term lease commercial properties. Realty Income focuses on standalone retail properties, rather than malls or residential units. Despite the inherent cyclicality in doing so, Realty Income has managed to raise its monthly dividend for 26 consecutive years. Further, it has raised its dividend 109 times since going public, essentially raising it every single quarter.
Realty Income was founded in 1969, and went public in 1994. The trust generates about $3.1 billion in annual revenue, and trades with a market cap of $41 billion, making it one of the largest REITs in the market.
Realty Income's yield today is very high at 4.7%, which is about triple the S&P 500's, and relatively high by its own historical standards. Realty's average increase in the past decade is in excess of 5%, which is still good growth in the payout from a REIT.
The payout ratio for this year is 75%, which is about where you'd expect a REIT to be. We believe this means Realty's dividend is safe through this recession, or any subsequent recessions, because the trust has proven to be extremely well-managed over the years. We also expect 4% annual earnings growth from 2022 levels, so there is likely to be plenty of capital available to return to shareholders.
Trust Federal Realty Investment
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 more than 3,000 tenants, 25 million square feet, and 3,200 residential units. Federal Realty has managed to boost its dividend for an incredible 54 consecutive years, making it a Dividend King, and the only REIT on that prestigious list.
Founded in 1962, FRT produces about $1 billion in annual revenue, and trades with a market cap of just over $8 billion.
Federal Realty has increased its dividend by about 4% annually over the past decade, and we see similar growth going forward. The trust suffered during the Covid-induced recession because retail tenants were forced to close. However, that appears to have been unwound, and we expect 5% annual growth in earnings going forward.
The current payout ratio is 72%, which is quite sustainable for Federal Realty, and we note that the trust's payout never hit 100% during the Covid downturn, despite a sizable hit to earnings. This highlights the trust's ability to weather recessions, and it's why we think the dividend will not only be safe during the next recession, but will continue to rise as well.
The trust yields 4.4% today, and with more than half a century of consecutive increases, Federal Realty is a top-tier dividend stock in every way.
We believe the best way to weather tough periods in the market is to focus on the long-term. That means finding high quality dividend stocks that are likely to continue raising their payouts, whatever the economy brings, and we find Essex, Realty Income, and Federal Realty to fit that bill.