Now that COVID-19 vaccines are being distributed, it appears that we should start thinking about economic recovery, and which stocks will benefit the most.
While income is hard to come by in this low-interest-rate environment, there are still great candidates out there. These stocks are high dividend payers that were sold off due to the pandemic lockdowns but managed to maintain or raise their dividends despite the economic challenges. While they are still being impacted by the pandemic, that impact will lessen over time. These stocks are also still down for the year, which makes them good rebound candidates.
The flight from cities may be only temporary
Equity Residential (EQR 0.90%) is an apartment REIT that specializes in urban locations. These apartments are designed to attract young, educated workers -- precisely the type of worker that is least affected by the COVID-19 crisis.
Equity Residential has struggled along with the entire REIT sector this year due to fears that tenants will be unable to make rent. The other issue for Equity Residential has been the flight out of urban areas to suburban locations. While Equity Residential does have some suburban properties, New York, Boston, and San Francisco account for about 23% of rent. Turnover was decreasing occupancy rates, although the company saw signs of optimism in October.
With a vaccine now available, the pressure on occupancy and renewal rates should continue to abate. Equity Residential mentioned in its third-quarter earnings call that it is seeing improved application volume and renewal activity, although it cautioned that it's still early and the situation is volatile. Property prices are still holding up, as the company just sold a big apartment complex in San Diego for $312.5 million, which was the pre-pandemic valuation for the property. Equity Residential pays a quarterly dividend of $0.60 per share, and has maintained its dividend throughout the crisis. At current levels it works out to a yield of 4.1%.
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Retail and services will improve as the pandemic fades
Realty Income (O 1.94%) is another REIT that should benefit from a return to normalcy. Retail REITs like Simon Property Group and Macerich were hit hard by mall closures and were forced to cut their dividends. But Realty Income's business model focuses on a different, less economically sensitive tenant. Despite the COVID shutdowns, Realty Income was able to raise its dividend this year.
Realty Income focuses on tenants that are less sensitive to the economic cycle -- think drug stores, convenience stores, and dollar stores. In the early stages of the pandemic, as state and local governments ordered shutdowns to stop the virus' spread, most of Realty Income's tenants were considered essential and permitted to stay open. While the company was affected by closures for some of its services tenants (especially movie theaters, gyms, and child care centers), it navigated the COVID-19 crisis better than its competitors.
Realty Income is a Dividend Aristocrat, which means it has raised its dividend for at least 25 consecutive years. Realty Income pays a monthly dividend of $0.23, which works out to be a dividend yield of 4.5%.
While COVID-19 cases are rising again, the presence of a vaccine means that investors can begin to "look over the valley" toward the big recovery. The economy was almost picture-perfect before the COVID-19 crisis, with unemployment at 3.5%, and GDP growth above 2%. This recession was not the cause of economic rot in the underlying economy, and there are no major structural issues to fix. This means that once people get the vaccine and infections fall, the economy should recover quicker than in a normal recession. These two stocks should rebound strongly as that happens.
