With interest rates stuck below 1%, finding income in today's market can be difficult. Therefore it makes sense for income investors to focus on companies that have some sort of advantage over their competitors. One of these stocks has a massive portfolio of renewable energy assets, another rents office space to the most resilient companies in the most attractive markets, and another weathered the massive sell-off in March and April better than all of its peers. These stocks are the most likely to maintain their dividends or have a long track record of raising them.
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NextEra Energy
NextEra Energy (NEE 0.51%) is a public utility and a Dividend Aristocrat -- a company with a long-term record of increasing dividends. NextEra operates Florida Power and Light, which is a regulated electric utility, and NextEra Energy Resources, which includes wholesale electricity trading and operates clean energy assets in most of the United States.
NextEra generates more electricity than its customers use, and sells the excess in the market. Since Florida Power and Light is regulated, its steady earnings stream can offset some of the price volatility in the wholesale electricity market. The clean energy arm represents almost 20,000 megawatts in generation capacity, of which 59% is wind, 32% is nuclear, and 6% is solar. Nextera generates more energy from solar and wind than any other regulated utility. The focus on renewable energy will also attract investment dollars from ethical, social and governance investors. NextEra pays a quarterly dividend of $1.40, which works out to be a 2% dividend yield. Nextera trades at 30 times expected 2020 earnings per share, which is high for a regulated utility, however the EPS growth is better too. If Washington, D.C., changes parties, expect to see more mandates for renewable energy, along with the potential for tax breaks which can only help the company.
AGNC Investment
AGNC Investment (AGNC -1.28%) is an agency mortgage real estate investment trust (REIT). Unlike most REITs, which invest in properties and rent them out, AGNC buys securities, specifically mortgage-backed securities, which are guaranteed by the U.S. government.
The mortgage REIT sector was put through the wringer early in the COVID-19 crisis as credit dried up, and many REITs were forced to unload assets at fire-sale prices. Every mortgage REIT cut its dividend and reported a significant drop in book value per share. Some eliminated the dividend completely.
AGNC management mentioned on its second quarter earnings call that, in hindsight, AGNC probably didn't need to cut the dividend from $0.15 a month to $0.12 a month. The crisis for the mortgage REIT sector is over, and while most have completely changed their business models, AGNC survived the crisis without being forced to do that. ANGC Investment's 10% dividend yield is attractive enough, but the stock also trades at a 6% discount to its book value of $14.92. Since mortgage REITs generally trade right around book value, this is a second source of potential return, which gives AGNC potential as a value stock as well as a dividend stock.
The assets AGNC holds have largely returned to normal courtesy of the Fed's buying, which means a dividend hike or buyback could be in the future. There are many ways to win in this stock.
Kilroy Realty
Kilroy Realty (KRC -1.42%) is an office REIT that specializes in high-end office space in the big cities on the West Coast. While it has been fashionable to speculate that COVID-19's successful test of remote working will mean the demise of office space, that concern is probably overblown. Kilroy's tenant base is largely tech companies and life sciences companies. Life sciences are probably not conducive to remote working to begin with, and Kilroy's current offerings feature amenities that resonate with younger, higher-paid knowledge workers. Just to add a data point to the resilience of the office market, Kilroy competitor S.L. Green signed up tenants for 280,000 square feet in Manhattan during the second quarter and said that most of its tenants were planning on returning to their offices soon after Labor Day.
Kilroy's tenants are also making rent; the company said that it collected 95% of contractual rent during the second quarter. On the second quarter earnings conference call, Kilroy CEO John Kilroy gave some color on what he is seeing:
We are in constant contact with our tenant base up and down the coast, and they are focused on reestablishing their work environment and getting back to the office, while at the same time, protecting the safety of their employees...We believe that our West Coast markets are among the most attractive in the world. Amidst all the uncertainty over the last several months, one thing that has become clear is the strength and resiliency of the technology, media and life science companies that drive our markets. These companies continue to grow their revenue, are well capitalized and are positioned for growth...It is still early, but our view is that workplace flexibility will become more common, and it will be in conjunction with the office, not replace the office.
Kilroy also discusses the fact that Kilroy's buildings are the youngest on the West Coast, with greater flexibility for floor plans, low-rise (thus eliminating the need for crowded elevators), and the most modern HVAC systems. During the quarter, the company leased 286,000 square feet of space at an 11% increase in rent.
Finally, Kilroy recently raised its dividend, increasing it to $0.50 from $0.485. This works out to be a yield of 3.3%. The conventional wisdom that work-from-home means the death of the office may not prove to be the case.