Investors looking for income stocks should take a look at the real estate investment trust (REIT) sector. Income investors are generally more risk-averse than growth investors and tend to concentrate on stocks with durable business models and a long history of navigating different markets. Companies with long histories of dividend hikes are ideal candidates.
Here are two REITs that also happen to be top dividend stocks that you can feel confident buying and holding forever thanks to their great business models and long history of dividend increases.
1. Realty Income: The Original Dividend Aristocrat
Realty Income (O) is a stock that should be a staple of an income investor's portfolio. It is a Dividend Aristocrat which has been in operation since the late 1960s, so it has seen a lot of ups and downs in the market and managed well all along the way. The company is in the triple-net lease business, which means it develops single-tenant properties and rents them out to high-quality tenants under long-term leases where the tenant covers most of the expenses.
Most real estate investment trusts were hit hard in some way by the pandemic. The extended lockdowns early in the pandemic were exceptionally hard on retail REITs, especially the mall REITs. Realty Income fared better than most because many of its tenants were considered essential businesses and permitted to stay open. Realty income's main tenants include drug stores and convenience stores, which have highly defensive business models. Realty Income's service-oriented tenants include movie theaters and fitness centers, which have suffered during the pandemic. But just about all its tenants have largely recovered at this point and Realty Income collected 100% of its rent from theater clients and 96.7% from its health and fitness clients in 2021.
Realty Income pays a monthly dividend (it calls itself "The Monthly Dividend Company") and recently increased the dividend to $0.247 per share, which gives the company a dividend yield of 4.5%. It hiked the dividend three times in 2021 and has been investing for the future, buying competitor VEREIT and investing in new properties. This will support further dividend hikes down the road.
2. American Tower: A decade of dividend hikes
American Tower (AMT) is another interesting story. It invests in cellphone towers and operates as part of a duopoly with Crown Castle International (CCI). American Tower leases out capacity on its towers to cellphone companies, governments, and cable operators.
These leases generally last a long time (a decade or so on average) and have automatic rent escalators factored in. In addition, the cost for a cellphone company to switch its tower provider is quite large, so these contracts tend to be very sticky once established.
The long-term story for American Tower is based on the potential for 5G applications, which will increase demand for mobile data. It has also been active on the merger front, buying data REIT Coresite, which will help diversify its revenue stream.
American Tower has an unusual record of dividend increases. It has bumped up its quarterly dividend every single quarter since 2012. The stock is a hybrid of a REIT and a growth stock, so its yield is lower than the typical apartment or office REIT, but it has a long-term stock price growth story that should give the company above-GDP growth for the foreseeable future.