The word "recession" strikes fear into the heart of Wall Street -- and for very good reason. A business slowdown is bad for, well, business.
But some companies have what it takes to muddle through an economic hard patch in relative stride while continuing to reward investors with reliable dividend checks. Those dividend payments help to soften the emotional blow and keep you invested while other stocks get sold off in a panic.
If you are worried about a recession, it's time to learn about real estate investment trusts (REITs) Federal Realty (FRT 1.53%) and Realty Income (O 1.46%) and why they can be a lifeline in a recession.
They own properties in all the right places
Federal Realty owns strip malls and mixed-use developments. They are, largely speaking, pretty boring assets, but these properties live at the heart of everyday life. In fact, roughly 75% of the company's properties contain a grocery store -- providing one of the most basic of basic needs (food). This is one of the reasons why the REIT has been able to increase its dividend for 55 consecutive years, the longest streak in the REIT sector.
Image source: Getty Images.
Before moving on to the company's bonafides, think about what has happened over the past 55 years. Just in the past two decades, there was a global pandemic, the Great Recession, and the technology bubble. Before the turn of the century, there was Black Monday, the OPEC oil embargo, and the elevated inflation of the 1970s, among many other notable headwinds. Federal Realty's dividend kept growing through all of this going back to 1967. That's a reliable dividend. And it's exactly what you'll want in your portfolio to soothe your frayed nerves if there's another economic dislocation.
Federal Realty's strength comes from its focus, which is unique among its closest peers. Specifically, the REIT only owns around 100 or so properties. But they're located in areas with material population density (177,000 people within three miles) and, even more important, high average annual incomes ($151,000).
Its properties are, basically, exactly where retailers want to be. That's doubly true when there's a recession, which tends to dent the buying power of those with lower incomes more than those with high incomes. Federal Realty's dividend yield is a generous 4% or so today.
The other side of the spectrum
Federal Realty benefits from being small and focused, while Realty Income manages to make its massive size a differentiating factor. To put some numbers on that, this net lease REIT owns over 11,700 properties and has a market cap of $40 billion, roughly twice the size of its closest peers. Realty Income has increased its dividend annually for 27 years, dating back to 1995. That's not quite as impressive as Federal Realty, but the payment has grown in the face of many of the same major economic and market dislocations.
There are a lot of reasons why size is a benefit for Realty Income. For starters, it tends to own retail properties that are single-tenant and, frankly, pretty interchangeable. That means that its assets are fairly liquid and easy to release in a worst-case scenario.
The leases are also net leases, which means that the tenant is responsible for most of the operating costs, allowing Realty Income to keep its expenses (and risks) fairly low. Meanwhile, the average lease length is roughly 10 years, which is more than enough time to weather most economic downturns. So far so good, but there are other REITs that benefit from all of this, too.
The real separating factor here, as noted above, is Realty Income's size. It is the 800-pound gorilla in the net lease industry. It also happens to have an investment grade rates balance sheet. Put all of this together, and the stock is generally afforded a premium relative to its peers. And that means Realty Income has a low cost of capital. This is no small issue, as it allows the REIT to do deals at aggressive pricing and, thanks to its scale, it can take on large transactions that peers couldn't handle alone.
During economic downturns, when companies looking to grow may have trouble accessing cash, Realty Income will be ready to provide it at competitive rates. That, in turn, will help the REIT continue increasing its dividend. That's a win/win for everyone involved.
Terrible times require a shift of view
There's no question that a recession will feel bad and likely lead to some paper losses in your portfolio. But getting through such rough patches, while staying invested, has long proven the best course of action on Wall Street. When tough times hit, you'll want survivors like Federal Realty and Realty Income in your portfolio. And, while the rest of the investment world is focused on the negatives, you can focus on the steady dividend checks you're getting from companies with differentiated business models.
