Accelerating inflation and the prospect of more interest rate hikes to come have led the estimated probability of a U.S. recession in the next 12 months to skyrocket recently. In fact, the odds were just 20% in March and are now just under a coin toss at 47.5%.
How can investors prepare themselves for a recession? I'm preparing my portfolio by adding reliable, high-yield dividend stocks. Here are a couple of real estate investment trusts (REITs) that are on my radar in the current bear market that other income investors should consider buying for themselves.
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1. Digital Realty Trust
Data centers are a focal point in the modern economy that store and compute data. Whether individuals, businesses, or government entities are checking emails, browsing the web, or communicating on messaging apps, all activities depend on functioning data centers.
Digital Realty Trust's (DLR 1.50%) $34 billion market capitalization and nearly 300 data centers around the world make it one of the biggest data center owners on the planet. Increasing adoption of technologies like virtual reality and global economic growth is expected to result in a promising future for the data center industry. The market research firm Allied Market Research is projecting the global data center market will compound at 10.5% annually from $187 billion in 2020 to $517 billion in 2030. This is why I believe that the data center REIT will at least be able to grow its core funds from operations (FFO) per share at a mid-single-digit annual rate for the foreseeable future.
If this encouraging outlook wasn't enough, Digital Realty Trust also offers a market-topping 4.1% dividend yield. For context, this is more than double the S&P 500 index's 1.7% yield. And yield-focused investors can sleep well at night knowing that the dividend is well covered with a dividend payout ratio poised to be 71% in 2022.
To top it all off, Digital Realty Trust's association with tech has caused it to plummet 32% year to date. This has pushed the data center REIT's forward core-FFO-per-share ratio down to just 17.5 -- hardly an expensive valuation for a stock of its quality.
2. W.P. Carey
With more than 1,300 properties in the U.S. and Europe, W.P. Carey (WPC 0.27%) is a well-known net lease REIT. The company's business model works by purchasing properties from clients and releasing them to those same clients.
But why would businesses sell their real estate to the REIT? Doing so allows them to tap into the equity from their properties, which can be used to pay down debt or expand operations. The appeal to W.P. Carey is that its tenants pay all expenses associated with leased properties, as well as base rent checks to the company each month.
Better yet, the company's leases have more than a decade remaining. The cherry on top is that the bulk of W.P. Carey's leases (60%) are linked to inflation, which means that rent revenue will jump much higher in the quarters ahead. And another 39% of the REIT's leases come with rent increases that are a fixed percentage.
Given W.P. Carey's 78% dividend payout ratio, the stock's generous 5.1% dividend yield also appears to be safe. And investors looking to boost passive income can scoop up shares of W.P. Carey at a forward price-to-adjusted-FFO-per-share ratio of 15.9.
