Income investors who are hoping to keep up with inflation should focus on companies that have a long track record of increasing dividends. Luckily, someone has gone to the trouble of compiling just such a list of elite companies that are in the S&P 500 and have strong enough earnings to raise their dividends annually for at least 25 consecutive years. These companies are called the Dividend Aristocrats.
While not all the Aristocrats raise their dividends to exceed inflation in a given year, there are some who have managed it. For instance, income investors might want to take a look at the real estate investment trust (REIT) sector to find inflation-beating yields and growth. Here are two real-estate-based Aristocrats that are worth a look.
Look for fast-growing rents out West as real estate prices soar
Essex Property Trust (ESS -0.41%) is a REIT that focuses on West Coast apartments. Its main markets are Southern California, Northern California, and Seattle. As of Sept. 30, the company owned 60,799 properties in 246 operating communities.
Like most landlords, the COVID-19 pandemic negatively affected occupancy and payments as many people were out of work, and eviction moratoriums kept the non-payers in place. Essex dealt with the issue by "buying occupancy," which means lowering rents in order to keep units filled. The downside of this is that those discounted leases impacted revenue growth; however, those leases are expiring and getting reset to market rates.
The West Coast underperformed the rest of the U.S. with respect to job losses during the pandemic as San Francisco and Seattle had extended shutdowns. Since then, job openings have increased by 152% since the bottom in August of 2020. These markets also have high home prices, and the real estate indices have grown faster out West than the rest of the U.S. Rents are roughly half the price of a typical mortgage payment in Essex's markets, compared to about 90%, which is the 20-year average in the U.S. This means Essex can raise rents comfortably.
Essex pays a quarterly dividend of $2.09 per share, which gives it a dividend yield of 2.37%. This is on the low side for a REIT, but Essex has a 27-year track record of dividend hikes. As rents readjust to market, earnings will rebound for the company. It is worth a look from income investors who want some exposure to the hot West Coast real estate market without having to buy property.
This company hiked its dividend three times during 2020
Realty Income (O 0.58%) is another REIT that makes the list of Dividend Aristocrats. Realty Income specializes in single-tenant operating properties and leases them to investment-grade tenants under long-term agreements. Its biggest tenants are drug stores, dollar stores, and convenience stores.
Realty Income's tenant base is generally in highly defensive industries. This means they are more resilient than most companies. For example, if the economy turns south, people may forego buying a new TV, but they will still buy deodorant and candy. This resilience came in handy during the COVID-19 pandemic of 2020, as most of Realty Income's tenant base was considered an essential business and permitted to operate.
Realty Income goes by the moniker "The Monthly Dividend Company" and is one of the classic Aristocrats. The company has been around since 1969, so it has seen an economy cycle or two. Despite the COVID-19 pandemic, Realty Income hiked its dividend three times in 2020. It just raised its monthly dividend 7.6% to $0.246 per share. This gives the company a dividend yield of 4.3%. Realty Income is one of those companies an income investor can use as a core holding. It is well run, pays well, and is a "lets you sleep at night" stock.