The coronavirus pandemic is ravaging the world. More than 1 million people have been diagnosed with COVID-19, and tens of thousands of those have died. Attempts to arrest the spread of this deadly and highly contagious virus has stopped the global economy in its tracks, crashing global stock markets.
At this writing just before U.S. markets close on April 3, the S&P 500 is down 27% from its 2020 peak. The full economic implications of the coronavirus pandemic are becoming more apparent. We have seen a record-smashing 10 million Americans file for unemployment over the past two weeks, and the U.S. experienced its first net-job-losing month in March in a decade.
This has many people with the means, looking more closely at dividend stocks, whether for income, or for durable businesses that have better prospects in an unprecedented economic environment. I've been an aggressive buyer over the past six weeks, including investing in these five dividend stocks:
|Dividend Stock Name||Industry/Sector||Price Change From 2020 Peak|
|American Express (NYSE:AXP)||Banking||(46.5%)|
|Bank of N.T. Butterfield & Son (NYSE:NTB)||Banking||(57.4%)|
|Brookfield Infrastructure Partners (NYSE:BIP)||Infrastructure assets||(37.6%)|
|Clearway Energy (NYSE:CWEN.A)||Renewable energy producer (yieldco)||
|CareTrust REIT (NASDAQ:CTRE)||Healthcare REIT||(44.7%)|
Keep reading to learn why I invested in these five dividend stocks, along with my expectations.
This is not another 2008 for banks
Bank stocks have taken a beating over the past month. The Financial Select SPDR ETF (NYSEMKT:XLF) (which tracks a wider group of financials as well as banks) is down 37% from the 2020 high. Financial activity has ground to a halt as millions of businesses have been ordered to close, and it's expected that much of the usual lending activity will slow to a crawl, including auto purchases and new home acquisitions that often make up a tremendous amount of a bank's results.
American Express and N.T. Butterfield are two of the hardest-hit bank stocks, and they aren't risk-free. But between the they both look incredibly compelling right now, because this isn't the same kind of environment for banks as we we experienced during the last financial crisis.
The next several months -- perhaps longer -- are going to be painful. Economic activity could fall by the steepest levels on record. But the financial sector will remain critical, with the federal government using the Small Business Association to coordinate lending to keep businesses afloat and employees being paid.
But I didn't invest in Butterfield Bank or American Express because of that. I invested in them because they're financially strong, and the customers that make up their base are some of the most-likely to avoid the coming economic storm. Butterfield is an offshore banker in the Cayman Islands, Bermuda, and the Channel Islands, while AmEx has always focused on higher-income clientele for the core of its lending and credit card businesses.
So while there's risk that things could get worse and both could struggle to some extent, even to the point that one or both might cut their dividend to preserve cash. But my expectation is that those struggles would be lesser than many other banks, and both should emerge from the coronavirus recession in great shape for a big, profitable recovery.
A little safer, still tremendous bargains
Even during periods of economic recession, there are certain businesses that continue to generate steady cash flows. This includes telecommunications, water utilities, electricity production, and other infrastructure assets that remain necessary for modern society to function.
That's at the heart of why I bought Brookfield Infrastructure and Clearway Energy. Brookfield focuses on infrastructure assets like water systems, natural gas and electricity transmission, telecommunications, and transportation. Clearway owns solar and wind energy production facilities, and sells the power to utilities that use the power to meet their customer's demand.
Neither has seen its share price fall so much as these two banks, with their shares down 37% (Brookfield Infrastructure) and 25% (Clearway) from their 2020 highs at this writing. But that's a product of what the market expects should prove as lower-risk investments.
I think it's also far more likely that they should be able to maintain their dividends during the downturn, particularly Brookfield, with its strong balance sheet and cash flows. Clearway has more exposure to a single market -- California -- where electricity demand could fall, but its margin of safety on the dividend should prove enough for it to maintain the payout.
Either way, even with the risk of a payout cut that would likely prove temporary, both have tremendous long-term prospects that make the current price too attractive to ignore.
An necessary industry that may seem scary right now
The headlines about nursing homes are disheartening right now. COVID-19 infection outbreaks in these facilities are filled with some of the most at-risk populations, already resulting in hundreds of deaths. As a result, investors have heavily sold REITs that specialize in nursing home and other seniors living properties.
But as horrifying as the news has been, and how frightening things are now, nursing homes will continue to play an important role in housing and caring for senior citizens, both now and in the future.
Why CareTrust versus some of its peers with stocks down more than 50% below their pre-crash peaks? That represents a better upside, right? Sure, maybe it does, but I think this is an example of when it's best to focus on protecting the downside versus just looking for the biggest possible gains.
CareTrust has one of the strongest balance sheets in the industry, with almost half the debt to equity of bigger peers like Ventas (NYSE:VTR) and Welltower (NYSE:HCN), and far lower debt-to-EBITDA ratios. That means it has both a wider margin of safety on its existing cash flows, and more room to take on debt for additional liquidity if necessary.
Moreover, its CEO was a co-founder of Ensign Group, from which CareTrust was spun out a few years ago. Ensign Group is a top care provider, and I think CareTrust's legacy on both the resident care and property ownership sides of the business is an advantage.
Add it all up, and CareTrust may not be as beaten-down as some of its peers, but it should prove the safer, and more resilient company. And that should help keep its dividend a little safer until the COVID-19 health crisis is over.
Managing risk and reward with dividend stocks
Let me be clear. I'm not completely convinced that all five will be able to maintain their dividend payouts over the next year, but I expect that if any do need to halt or cut their payouts, it will prove only a temporary move.
But even with that possibility, my expectation is that, once we beat COVID-19 -- and we will -- things will return to normal. And when that happens, today's prices will prove to be tremendous bargains on these excellent businesses.