Even after this year's steep stock market decline, many investors are concerned that there's further to fall before it hits bottom. If you are worried about capital preservation, here are a couple of companies with highly stable business models that are resilient even during recessions, and they pay dividends, too.
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Realty Income is a stalwart holding through thick and thin
Realty Income (O 0.11%) is a real estate investment trust that focuses on leasing single-tenant stand-alone properties to companies in highly defensive businesses. Its triple-net lease business model means its tenants are responsible for nearly all of the operating costs of their properties, including taxes, insurance, and maintenance.
Why would a tenant find this sort of lease attractive? Because it offers more certainty. Under a typical "gross lease," where the landlord handles all of the expenses, the terms are generally shorter, and new rents are negotiated every year. A triple-net lease generally lasts 7 years or longer, and the annual increases are written into the original agreement. Since these are big commitments, Realty Income tends to focus on a certain type of tenant.
The ideal tenant for Realty Income carries an investment-grade rating and operates in a defensive industry -- a drug store, dollar store, or convenience store chain, for example. These types of businesses are largely insensitive to economic cycles, in contrast to the typical shopping mall tenant which sells largely discretionary items. In a recession, you are better off selling toothpaste than fashion.
Realty Income was put to the test during the early days of COVID-19. While most of its tenants were considered essential businesses and permitted to remain open, some were not (especially movie theaters), and the company experienced losses on these leases. Despite that, it raised its dividend three times in 2020, demonstrating why this stock should be a core holding for income investors.
Utilities make for safe havens
Duke Energy (DUK 0.08%) provides electricity and natural gas service to homes and businesses across the Southeast. As a regulated utility, it has an extremely stable business model. Even if the market crashes or the economy tanks, people will still need electricity.
Duke Energy must negotiate the rates it can charge customers with regulators in every state in its service area. While this may appear at first to be a negative, the company gets to be a monopoly and it also means that the company can feel confident in its ability to charge enough to generate a reasonable rate of return. Regulators know that if they set rates too low, bad things can happen -- trees don't get trimmed, maintenance gets deferred, and the utility's debt ratings could suffer, which would mean increased borrowing costs and eventually higher expenses overall for customers.
Duke Energy is not the type of stock that is likely to double in value. But it's a steady player that should appeal to income investors and is likely to hold up even in an economic downturn. Duke is trading below 20 times estimated 2022 earnings per share, and at its current price has a dividend yield of 3.7%.
If you invest $1000 in each of these two companies, you can expect to get almost $79 annually in dividend income. Making periodic investments of this size is the key to building an income portfolio for retirement.
