Finding good income stocks is more than just a matter of chasing yield. High dividend yields telegraph risk more often than they signal opportunity. If you are at or near retirement, protecting capital is paramount, and steady income is part of that. Part of the art of income investing is finding stable companies that still have some growth ahead of them.
These stocks will be able to grow their dividends as earnings increase. This provides the income investor with added safety and stability -- especially important for retirees.
Alexandria is poised to benefit from increased medical research spending
Alexandria Real Estate Equities (ARE 1.72%) is a real estate investment trust (REIT) that focuses on office properties. The knock on office REITs in general has been the adoption of working from home due to the pandemic. While very few people think companies will eschew office space entirely, the consensus seems to be that they will need less square footage for the same productivity.
Alexandria has been one of the few companies not affected by this fear, due to its tenant base. It specializes in life sciences companies, which often need sophisticated lab spaces -- meaning much of the work cannot be done remotely. Its biggest tenants include major pharmaceutical companies like Bristol Myers Squibb, Takeda Pharmaceuticals, and Sanofi.
The pandemic drove heavy government funding in life sciences, and on the first-quarter earnings conference call, CEO Joel Marcus said the current demand for lab space is as strong as the company has ever experienced. Alexandria was one of the few office REITs last year to report an increase in funds from operations (FFO, what REITs typically use for earnings), and the company has been investing heavily into development. At Tuesday's prices, the stock pays a 2.5% dividend, which is on the low side for a REIT, but as earnings grow, so will the dividend.
STORE Capital is a Buffett stock that provides stability
STORE Capital (STOR 0.79%) is another REIT, this one focusing on single-tenant operational real estate (hence the STORE acronym). It builds stand-alone buildings with long-term leases for single tenants such as a drugstore, dollar store, or convenience store. The tenant will sign a triple net lease, meaning it agrees to pay the operating expenses such as insurance, taxes, and maintenance. Essentially, STORE Capital can borrow at cheaper rates than the typical tenant: Its value proposition is lower occupancy costs for the tenant due to its superior borrowing rate.
STORE is a Warren Buffett stock as well, with Berkshire Hathaway (BRK.A -0.08%) (BRK.B 0.09%) owning 9% of the company. It reported a decline in FFO per share last year due to tenant struggles, but the company is guiding for around $1.93 in FFO per share this year, a 5.5% increase compared to 2020. The stock pays a $0.36 quarterly dividend, for a 4.2% yield. Unlike most REITs, STORE raised its dividend last year. This stability is one reason it's a good retiree income stock.
Prologis will benefit from a rethinking of inventory management
The pandemic revealed some difficult truths about vulnerabilities in corporate logistics. Ever since the pandemic, the U.S. has experienced all sorts of shortages, including toilet paper and lumber. Prologis (PLD -0.13%) is one of the premier logistics REITs, and its warehouses are where many companies store inventory (if you have driven along an interstate, you have probably seen huge warehouses with dozens of truck bays). Prologis' biggest customers include Amazon, Home Depot, and FedEx.
The pandemic-induced shortages have executives coming to the realization that "lean and mean" inventory management carries risks. Prologis believes that corporations are going to build back inventories to higher levels than they were pre-COVID. This restocking will take years and should drive increasing earnings. CEO Hamid R. Moghadam says that demand for space is the highest he has seen in his career, which began in 1983.
Prologis just upped its dividend 9% to $0.63 per share, giving the company a 2.1% yield. This is on the low side for a REIT, but FFO per share grew 17% last quarter. Since this is a REIT, the dividend will rise more or less in lockstep with earnings. Investors have the benefit of knowing the company is heading into a multiyear expansion that will increase earnings and dividends.