Stocks have gotten clobbered over the past year. On the bright side, the sell-off pushed up dividend yields, making many of these investments more attractive.
Three dividend stocks that stand out for their dividend strength these days to a few contributors from the Motley Fool are Essex Property Trust (ESS 2.31%), Kimco Realty (KIM -0.54%), and Digital Realty Trust (DLR 1.50%). The share prices for all three real estate investment trusts (REITs) are down right now -- driving up their dividend yields to attractive levels -- but these prices might not last long.
This discounted apartment owner has grown payouts for decades
Marc Rapport (Essex Property Trust): The multifamily housing market is roiled by rising interest rates and recessionary fears that drove down share prices and made some attractive bargains out of some pretty solid companies.
A great example is Essex Property Trust, a longtime owner of apartment buildings in and around some of the hottest markets on the West Coast, where rents have quit rising and layoffs by major tech companies raised concerns about more bad news to come.
Essex's share price is down by about 36% in the past year, a collapse more than twice that of the S&P 500. That makes this a great opportunity to buy shares in a true dividend stalwart that has raised its payout annually for 29 straight years. The dividend yield is a respectable 4%.
Essex currently has a portfolio of 253 apartment communities with 62,000 units concentrated in Southern California, the San Francisco Bay area, and in and around Seattle, markets often dependent on high-tech jobs. But Essex is guiding for rent growth of 2% in 2023 and notes that job growth in its markets continues to exceed national figures, and unemployment continues to lag them.
As one example, this residential REIT notes that Alphabet's Google just broke ground for a San Jose campus that is expected to create about 25,000 new jobs in the next 10 years in an area where Essex has multiple properties. Demand for its apartments should also be helped along by rising interest rates that make it even more difficult for people to buy homes. Overall, Essex says, it's 2.3 times more expensive to buy than rent in its markets.
Numbers like these in markets like that point to continued positive payouts from Essex, and a battered share price makes this a great opportunity to pick up some shares now.
If a recession hits in 2023, Kimco will be a safer play
Brent Nyitray (Kimco Realty): Kimco Realty is one of the more defensive REITs out there. It develops supermarket-anchored developments. The company focuses as well on omnichannel retailers, which sell both in-store and online. The company's biggest tenants include TJX Companies, which owns discount department stores T.J. Maxx and Marshalls; Home Depot; and Whole Foods, which is owned by Amazon. The company operates 526 properties and has 91 million square feet of space. There has been limited development of retail space over the past 20 years as developers believed that brick-and-mortar stores couldn't compete with online retail. This translates into pricing power for Kimco.
Supermarkets and off-price retailers are generally considered to be defensive stocks. This is because when the economy slows people adjust spending on discretionary items to focus on necessities like groceries or discount goods. The Federal Reserve raised the federal funds rate in order to beat inflation, which will require a softening of economic growth. The Fed is targeting the labor market and that will probably mean rising unemployment. This will push consumers to tighten their belts and focus on the essentials. Home improvement is another defensive sector, as people will often choose to remodel in lieu of buying a move-up property.
Kimco offers a dividend yield of 4.3% and is trading at 13.5 times expected 2022 funds from operations per share. The company hiked its dividend every single quarter in 2022. The $0.92 annual dividend is well covered by the $1.57 to $1.59 FFO-per-share annual guidance. If the economy weakens dramatically this year, Kimco Realty will be one of the more defensive income stocks out there.
Digital Realty is trading at its best yield in years
Matt DiLallo (Digital Realty Trust): Shares of Digital Realty have lost a third of their value over the last year. That sell-off drove the data center REIT's dividend yield up to 4.6%. It's approaching its highest level in nearly a decade.
That makes now a great time to scoop up shares of this dependable dividend stock. Digital Realty has one of the best dividend track records in the REIT sector. It delivered its 17th consecutive year of increasing its payout in 2022. That extended its streak of giving investors a raise every year since its initial public offering in 2004, keeping it in a select group of REITs that have increased their payout every year since they went public.
Digital Realty should be able to continue growing its high-yielding dividend. Rents on its existing properties should steadily increase, driven by contractual rate increases of 2% to 4% per year on long-term agreements and strong demand for capacity as more companies digitize their operations. The company also has a growing pipeline of development projects, 60% of which it has already pre-leased. The REIT can also continue to make value-enhancing acquisitions. Last year, it spent $3.5 billion to acquire a majority stake in South African data center operator Teraco. Digital Realty has a strong investment-grade balance sheet to help fund developments and future acquisitions.
Shares of Digital Realty were under pressure on concerns that a slowdown in tech-related spending could impact its growth. However, demand for data center capacity remains robust. Because of that, investors can lock in a much higher yield by grabbing shares of this reliable dividend stock before they bounce back.
