There's a lot of uncertainty as we head into 2023. The Federal Reserve has rapidly raised interest rates to cool off red-hot inflation. That has many worried it might go too far and cause a recession.
However, some companies are relatively immune to the macroeconomic environment because they operate relatively recession-resistant businesses. Because of that, they should be able to grow their income and dividend payments in the coming years. Three dividend stocks a few Fool.com contributors believe are well positioned for what's ahead are Crown Castle (CCI -1.61%), Prologis (PLD 0.30%), and Realty Income (O 0.02%).
Crown Castle continues to be a tower of payback power
Marc Rapport (Crown Castle): Stocking up on Crown Castle is a fine idea for investors, as it has a forecast of growing dividends and a good chance of share price gain next year and beyond.
This titan of towers lays claim to being the largest provider of shared communications infrastructure in the U.S. Thousands of companies (including all the major mobile carriers), communities, and other organizations pay for space on its growing portfolio of more than 40,000 cell towers; 85,000 miles of fiber optic cable; and 115,000 small cells either on air or under contract.
This is specialized, essential infrastructure with high barriers to entry in the wireless telecommunications industry. In the past quarter century, Crown Castle stock has handily doubled the S&P 500 in total return. It's also a dividend machine, currently yielding about 4.2%. Its stock's down about 30% year to date, nearly double the plunge of the benchmark just mentioned.
Analysts rate Crown Castle a moderate buy with a target price of $163.93, which would be about a 13% gain from current levels. Meanwhile, the real estate trust has been delivering on its pledge from five years ago to grow dividends by about 7% to 8% a year.
Growing revenue while providing the infrastructure needed to support the ongoing telecommunications revolution in this country makes Crown Castle a good prospect for a 2023 buy with its once and future growth and income.
Built-in growth
Matt DiLallo (Prologis): Rental rates on warehouses have skyrocketed in recent years due to insatiable demand from e-commerce companies and other businesses. For example, leases signed by Prologis during the third quarter were a jaw-dropping 59.7% above prior rates on the same space.
However, because Prologis typically signs long-term leases, it's not yet capturing the full benefit of higher market rates. In the industrial REIT's estimation, its existing leases sit 62% below market rents. Because of that, the company believes its same-store net operating income will grow at an 8% to 10% annual rate for the next several years as legacy leases expire and it signs new ones at market rates.
In addition, the company had two other built-in growth catalysts. It recently acquired its closest rival, Duke Realty, in a $26 billion deal. The company expects that acquisition to be immediately accretive to its core funds from operations (FFO) per share. It also anticipates capturing more upside from the deal via cost savings and other drivers. On top of that, Prologis has an extensive development pipeline featuring many built-to-suit and pre-leased projects. These catalysts will add to its embedded rent growth.
Meanwhile, Prologis has a fortress-like balance sheet, including A-rated credit and low leverage. Its business is also on track to produce about $1.4 billion of post-dividend free cash flow this year. These features give it lots of financial flexibility to continue making acquisitions and investing in development projects to enhance its growth rate.
Put everything together, and Prologis seems like a lock to continue growing its 2.6%-yielding dividend at a sector-leading pace in the future. That makes it a great dividend stock to buy and hold long term.
In a recession, it pays to play defense
Brent Nyitray (Realty Income): Realty Income is a real estate investment trust (REIT) that focuses on leasing to businesses largely insensitive to economic cycles. This company develops single-tenant properties and employs a lease structure called a "triple-net" lease. Most leases are gross leases, where the tenant is responsible for rent and little else. Triple-net leases put most of the operating costs on the tenant's plate, including maintenance, insurance, and taxes.
These triple-net leases generally have longer terms and contain automatic rent increases. Given the size of the financial commitment, Realty Income tends to focus on companies with investment-grade credit ratings and target companies with highly defensive and durable business models. The typical tenant for Realty Income would be a convenience store, a drug store, or a dollar store.
Realty Income was tested heavily during the COVID-19 pandemic when lockdowns were imposed. Luckily most of its tenants were considered essential businesses and permitted to stay open. While many REITs were forced to cut their dividends during the pandemic in order to conserve cash, Realty Income raised its monthly dividend three times in 2020. Given the stock's long track record of dividend increases, Realty Income is known as a Dividend Aristocrat.
The big selling point of Realty Income's tenants is that they sell consumer non-discretionary items. If the economy struggles, people will forego expensive apparel, but they generally will still purchase vitamins, paper plates, and candy bars. Realty Income also has an attractive dividend yield of 4.6% and should be considered a core holding for an income investor.
