U.S. gross domestic product (GDP) declined 0.9% in the second quarter, which was the second consecutive quarter that U.S. GDP declined. A technical recession is defined as at least two consecutive quarters of negative gross domestic product growth, so the probability that the U.S. economy is in a recession is elevated.
With a determination yet to come from the National Bureau of Economic Research on whether the U.S. is officially in a recession, one thing is for certain: Investors would be wise to start loading up on recession-resilient income stocks. Here are two real estate investment trusts (REITs) to consider scooping up in August, which have also raised their dividends through past recessions.
1. Realty Income
Realty Income (O 0.52%) is a triple net lease REIT with more than 11,200 single-tenant properties. In addition to cutting monthly base rent checks, the company's tenants are responsible for paying property taxes, maintenance, insurance, and utilities.
Better yet, Realty Income's weighted average lease term of 8.9 years ensures that the company's rent revenue stream is stable. And with annual lease escalators in the U.S. of greater than 2% and tied to inflation in Europe, the company's annualized base rent is growing steadily before even considering acquisitions.
Why do tenants agree to terms that are highly favorable to Realty Income? It's likely because these tenants have a desire to tap into the equity from their property. And they know they can lean on Realty Income's size and scale to meet those needs. The capital proceeds received from selling property and leasing property back from the REIT are a convenient way for tenants to grow their businesses, pay down debt, and so forth.
Based on these characteristics, Realty Income looks like it has a winning business model. Given that the company has generated annual adjusted funds from operations (AFFO) per share growth of 5.1% over the past 25-plus years, the proof is in the pudding.
Since Realty Income's total addressable commercial real estate market is $12 trillion in the U.S. and Europe, the company should have no difficulty continuing to grow. In light of its mid-70% dividend payout ratio, the Dividend Aristocrat seems to have an adequate margin of safety to maintain its payout in a recession. And this will also allow the company to keep funding property acquisitions to build its portfolio further.
The cherry on top is that income investors can pick up the stock's market-topping 4% dividend yield at a sensible forward price-to-AFFO-per-share ratio of 18.9. Since real estate involves significant non-cash charges like depreciation and amortization, using net income and earnings doesn't provide a complete picture of profitability and valuation for REITs. AFFO adds depreciation/amortization to net income while subtracting capital expenditures and routine maintenance amounts, which provides a clearer idea of a company's profitability and valuation.
2. Digital Realty Trust
Anyone reading this article, browsing the web, or making online purchases is depending on the efficient operation of data centers to do so. With more than 290 data centers around the world, Digital Realty Trust (DLR 1.50%) is among the largest data center REITs in the world.
This leadership has paid off for the company so far. Digital Realty has grown its core FFO per share at 10% annually since 2005 and raised its dividend every year since then.
As the global economy becomes more reliant on emerging technologies such as virtual reality and existing technology, Digital Realty's property portfolio will only grow in importance moving forward. This is why I am forecasting mid-single-digit annual core FFO per share growth over the long run for the REIT. Core FFO is calculated by adding depreciation/amortization to net income and subtracting any capital gains from property sales. This gives investors a better understanding of the true profitability of a REIT without any of the noise that results from occasional property sales.
Considering the stock's 77% dividend payout ratio, I believe dividend growth should track core FFO in the future. Throw in Digital Realty's market-beating 3.7% dividend yield, and you have an appealing mix of current income and future income. Best of all, investors can snatch up shares of the stock at a forward core-FFO-per-share multiple of just 19.3.
