PepsiCo is a classic defensive stock. Companies that serve everyday needs for their customers aren't necessarily exciting, but their appeal in times of trouble mean they hold up during recessions. People may stop going to the malls during a recession, but they'll keep buying soft drinks and snacks.
JPMorgan recently predicted negative GDP growth in the first quarter. So investors who want a bit of defensiveness while maintaining some upside exposure to the U.S. economy may find the following stocks interesting -- while beating PepsiCo's dividend payout of 2.8%.
Mortgage REITs have huge dividends
Annaly Capital Management (NLY 2.55%) is a mortgage real estate investment trust (mREIT). Instead of owning property and charging rent, mREITs invest in real estate debt, mainly mortgages. The mREIT sector was pounded in the second quarter as the mortgage markets seized up. Eventually the Fed was able to calm the markets, and these companies have largely recovered.
Annaly focuses on residential mortgages guaranteed by the U.S. government. It borrows to buy the mortgages, and then earns a spread between the cost of borrowing and the returns on the mortgages. Annaly pays a quarterly dividend of $0.22, which works out to a yield of 10.8% as of Friday's close.
The mREIT sector isn't one that will experience huge capital gains like a growth stock. But these stocks will generally pay well-above-market dividends, though the dividends can be volatile, as we saw earlier this year. Annaly is one of my CAPS picks.
Trust banks are less exposed to the credit cycle
Bank of New York Mellon (BK -0.22%) is a trust bank, which is slightly different from a typical commercial bank. While most commercial banks generate their profit from making loans and taking deposits, trust banks generate more fee income.
Bank of New York performs custody services for many of the biggest mutual funds, which means it handles investments, redemptions, daily asset valuations, and other services. It also acts as the custody bank for corporations, performing cash management services. Lastly, Bank of New York owns Pershing, which is one of the biggest clearing firms.
Bank of New York's business model means that it takes less credit risk than, say, Bank of America or JPMorgan Chase. This means its income stream is much more resilient throughout the business cycle. Bank of New York's earnings will be more stable during downturns, but they won't rebound as fast once the asset writedowns are finished.
If the U.S. economy takes another move down due to COVID-19, Bank of New York's fee business should be relatively unaffected. It pays a $0.31 quarterly dividend, which works out to a 3.3% yield.
A housing shortage means good things for timber REITs
Weyerhaeuser (WY 1.17%) is a timber REIT, which means it owns and manages forests -- in Weyerhaeuser's case, about 25.5 million acres of timberland in the United States and Canada. Demand for timber is soaring as the COVID-19 crisis has boosted demand for single-family homes just as the available inventory was hitting lows.
In June, Weyerhaeuser suspended its dividend as a precaution but quickly reinstated it under a new framework. Prior to the coronavirus, it paid a $0.31 dividend, which would equal a 4.3% yield at current prices. Under the new framework, the company will pay a quarterly base dividend of $0.17 per share and then a variable cash dividend, such that it pays out between 75% and 80% of funds available for distribution. Weyerhauser's base dividend works out to be 2.4% before any sort of variable dividend. This is below Pepsi's -- however, the variable portion should push it higher, especially if 2021 is another great year for lumber demand.
The variable part will be paid out at the end of the year, which means Weyerhaeuser won't pay an excess dividend until the first quarter of 2022. This structure gives the company more flexibility so that in down years (like 2019), it can keep its payout ratio manageable at less than 100%, yet it can still spread the wealth in good years.
Given the burgeoning demand for single-family properties, and the fact that working remotely has made commuting less relevant, homebuilding should have a good run, which is good news for suppliers of lumber. The chart below shows the available supply of single-family homes measured as months' worth of supply. We are at record lows, with only 2.4 months' worth of homes at the current sales pace.
Given that six months' supply is more or less normal, and demand is surging, next year could be one for the ages for the homebuilding sector. Weyerhaeuser's base dividend is decent, and there is the variable dividend boost coming in 2022.