Investors living on Social Security need a heavier focus on safety than younger investors do, if only because they have less of a chance to recover losses. Therefore their choices in income stocks should focus on highly stable business models that can make it through difficult economic environments.
Real estate investment trusts are often fertile ground for income investors, because their REIT status requires them to distribute 90% of their income as dividends. Here are two REITs that income investors should consider.
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Realty Income is a highly defensive stock
Realty Income (O 1.10%) is one of my favorite income stocks. The company has been around since the late 1960s and has earned a place as one of the Dividend Aristocrats, a group of dividend payers that have a multidecade track record of annual dividend hikes. Realty Income develops stand-alone properties (mainly retail) that it then rents out to tenants under long-term leases.
During the COVID-19 crisis, most of Realty Income's tenants were considered essential businesses and were allowed to stay open. The company's biggest tenants include Walgreens, Dollar General, FedEx, and 7-11. Even during the depths of the pandemic, Realty Income still collected 84.9% of contractual rent. This is due to its largely investment-grade tenant base.
Realty Income pays a monthly dividend, which is something many retirees might find attractive. Despite COVID, the company raised its dividend three times during 2020. The stock has seen many economic cycles since 1969 and has persevered. It currently yields 4.1%.
Equity Residential's tenant base escaped the worst of the COVID-19 layoffs
Equity Residential (EQR 1.25%) is an apartment REIT that caters to high-income urban professional tenants. The company's portfolio is focused on urban areas that cater to knowledge industries, such as New York City, Washington, Seattle, and Boston, among others. The company's focus is on upscale services and top-quality amenities and buildings.
Equity Residential chooses markets where single-family homes are expensive and there is a heavy concentration of knowledge workers with high wage growth. These urban areas generally have high barriers to entry and scarce land. During the pandemic, the typical Equity Residential tenant was able to continue to work from home without skipping a beat.
The pandemic was difficult for Equity Residential, as it was for just about every REIT. While occupancy declined modestly during the year, the company wasn't in a position to negotiate rent increases when leases expired. In industry parlance, Equity Residential was "buying occupancy" by giving out concessions to keep tenants in place.
We have been seeing the effects of this phenomenon flow through to the income statement as declines in revenue and funds from operations. Since apartment leases generally run for one year, we should see those leases with COVID-19-related concessions run out during 2021 and reset to higher rents in 2022. The worst of this issue is in the rearview mirror.
Equity Residential has historically bumped up its quarterly dividend every year, but it did not increase the $0.603 per share quarterly dividend this year. At current levels, the stock yields just under 3%, which is close to the bottom end of its historical range. The big increase in yield during 2020 was due to weakness in the REIT space in general. The company maintained its dividend, but the stock market was hit hard by COVID-19. Take those yields with a grain of salt.
EQR dividend yield data by YCharts.
As a general rule, real estate investment trusts are great candidates for retirees looking to increase their income. Most have easy-to-understand business models, and the underlying real estate assets generally hold their value over time. Realty Income and Equity Residential are good choices for income investors who need to supplement their Social Security benefits.
