When the economy grows, most companies generate the capital needed to expand their operations and some even have enough to pay dividends to shareholders. However, economic downtowns and recessions can create a different story. Growth and capital dry up, hindering some companies' ability to continue paying dividends.
Strong companies prove their dividend staying power by paying out during both good times and bad. Three dividend stocks with durable dividends are Digital Realty (DLR 2.58%), Highwoods Properties (HIW 1.92%), and Simon Property Group (SPG 1.55%). Three Motley Fool contributors offer up some reasons why these dividend stocks are great buys right now.
1. Digital Realty: A data-powered dividend
Matt DiLallo (Digital Realty): This data center real estate investment trust (REIT) delivered its 17th consecutive annual dividend increase earlier this year, demonstrating its staying power. The 5% raise kept it in a select group of REITs that have raised their dividend every year since their initial public offering.
The REIT has the balance sheet to keep increasing that payout in the future. Digital Realty's dividend payout ratio has actually fallen over the years thanks, in part, to the company's steady growth. It was 77% of its adjusted funds from operations (a REIT's closest equivalent to earnings) earlier this year. That manageable payout gives it more cushion and enables it to retain more money to fund expansion. Meanwhile, the company has a strong investment-grade balance sheet with steadily improving credit metrics. That puts its payout on an even firmer foundation while giving it lots of financial flexibility to continue expanding its data center portfolio.
Digital Realty has 41 expansion projects underway across 18 metro areas. It has already pre-sold half this capacity, driven by strong customer demand. The company also continues to make strategic investments. Earlier this year, it bought a majority interest in Teraco, a data center operator in South Africa. With a strong balance sheet, the company has the financial flexibility to continue making investments to capitalize on the strong demand for data center capacity.
That demand driver will help Digital Realty keep growing its dividend for years to come. With the dividend yield rising to 4% following a big decline in its share price during this year's market sell-off, Digital Realty looks like a great buy right now for income seekers.
2. Simon Property Group: A beneficiary of falling gas prices
Brent Nyitray (Simon Property Group): Inflation is the headline story this year, and for good reason. Price increases forced the Federal Reserve to take aggressive action to slow the economy. Much of the inflation this year is driven by increased energy costs, especially the price of gasoline. After peaking in mid-June, gasoline prices are now falling. This is good news for the consumer, and it should help boost discretionary spending. Discretionary spending is what drives people to the mall, and one of the bigger beneficiaries will be the mall REIT Simon Property Group.
Simon Property owns 198 properties in the U.S., consisting of shopping malls, Premium Outlets, and The Mills. The company also owns an 80% stake in Taubman Group, which stems from a merger that was derailed by the COVID-19 pandemic. Like most REITs, Simon Property has struggled versus the broader market as investors fret about rising inflation and interest rates.
While rising inflation is tough on consumers, energy prices are returning to normal, which should provide some needed relief. In addition, the labor market is still red-hot with the unemployment rate sitting at 3.7% -- incredibly low compared to historical norms. Wage growth is robust as well, with average hourly earnings increasing 5.2% in August.
Simon Property Group's stock price is down about 38% so far this year, primarily due to higher rates and fears that a recession is imminent. That said, the company raised its 2022 funds from operations (FFO) guidance to a range of $11.70-$11.77 per share. Simon trades at 8.6 times FFO per share and has a 6.9% dividend yield. At these levels, the company represents good value for dividend investors.
3. Highwoods Properties successfully focuses on business districts
Marc Rapport (Highwoods Properties): Office REITs occupy a commercial real estate sector facing significant headwinds as the pandemic fades and many workplaces remain empty. Highwoods Properties, however, operates only in what it calls the "best business districts," or BBDs, in the fast-growing Sunbelt cities of Atlanta, Charlotte, N.C., Nashville, Tenn., Raleigh, N.C., Richmond, Va., and Tampa, Fla. The REIT is selling its Pittsburgh properties, the only exception to the Sunbelt rule, and has made its first entry into the Dallas market.
The strategy appears to be working. The company has been a consistent provider of passive income since its 1994 IPO, and it is now able to fund its aggressive acquisition and development pipeline without issuing any new equity thanks to a fortress balance sheet that has its net debt-to-EBITDA ratio at below six. That's while growing funds from operations by 8% year over year in the second quarter and even raising its mid-year guidance for that key metric by more than 3%.
As of Aug. 30, the 20 office REITs tracked by Nareit have posted a total return of negative 30.45% for the year and are yielding an average of 4.89%. Highwoods Properties is close behind with a total return year to date of negative 28.76% but it's yielding a nice 6.58%.
Highwoods Properties has also raised its dividend annually for five straight years and has a very manageable payout ratio of 38%. This adds to the confidence analysts have in this REIT, prompting them to rate the stock as a moderate buy. Investors, too, can share that confidence, based on the company's past performance and now its positioning for the years ahead.