Income investors, by their nature, tend to look at stocks with stable business models that have a nice payout. As a result, the core of an income investor's portfolio will often contain real estate investment trusts (REITs), master limited partnerships (MLPs), and regulated utilities. These stocks have easy-to-understand business models and are less sensitive to the economy than some of the fast growers.
Let's take a closer look at two solid dividend payers that fit one of these three categories and have what it takes to pay you for life.
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1. Kimco Realty operates grocery-anchored shopping centers in attractive markets
Kimco Realty (KIM 1.54%) is a REIT that operates grocery-anchored shopping centers and other mixed-use assets. As of Dec. 31, 2022, the company owned or had an interest in 532 shopping centers in 28 states with 90.8 million square feet of gross leasable area. The company's properties are concentrated on the East Coast and West Coast, with additional properties in Arizona, Texas, and Colorado. It focuses on drivable first-ring suburbs, the biggest cities in the Sun Belt, and coastal markets.
The company's main anchor tenants are well-known names such as TJX Companies, Home Depot, Albertsons, Ross Stores, and Amazon. The company is relatively diversified with only 10 tenants accounting for more than 1% of overall base rent. These tenants typically operate in defensive industries. If there is a recession, discount apparel, groceries, and home improvement spending will hold up better than luxury goods and apparel.
NYSE: KIM
Key Data Points
Kimco focuses on developing relationships with tenants that are omnichannel retailers. Many retailers are finding the "buy online, pick up in store" model saves costs and encourages impulse buys once the customer is in the store. A key driver for Kimco has been the limited supply of retail construction since 2009. The lack of new supply translates into pricing power for the REIT that owns the properties. Occupancy was hit during the COVID-19 pandemic, but it reached 95.7% in the fourth quarter, which is just below its all-time high of 96.4% it set in the fourth quarter of 2019.
Kimco was forced to cut its dividend during the worst of the pandemic, but it soon began hiking its dividend again and the current rate is approaching pre-pandemic levels. I am inclined to give the company the benefit of the doubt on the dividend cut in the early days of the pandemic. The company earned $1.58 per share in funds from operations (FFO) in 2022 and is guiding for 2023 FFO per share to come at similar levels. This puts the stock at a price-to-FFO ratio of 12, which is an attractive multiple for a leading REIT. The company has a dividend yield of 4.7%.
2. Duke Energy is a stalwart utility that focuses on regulated gas and electric service
Duke Energy (DUK 1.71%) is a regulated utility providing electrical and gas services to the Carolinas, Florida, and portions of Ohio and Indiana. Regulated utilities have a long track record as stellar dividend payers, and operate in a highly regulated market. Most states have a public utilities commission that sets the prices that the utility is permitted to charge. While the regulators have an incentive to drive a hard bargain, they know if they push too hard, they can increase the utility's costs, which would then be passed on to the ratepayers. The end result is that utilities are permitted to make a reasonable return in exchange for a near monopoly in their service areas.
NYSE: DUK
Key Data Points
Duke Energy operates in some of the fastest-growing service areas (Florida and the Carolinas). The company generates most of its power from natural gas, nuclear, and coal, and only 1.5% from renewables. Non-regulated renewable energy is highly competitive and often the returns are marginal. Duke seems happy to focus on regulated service, which makes it a boring albeit stable utility. Duke stock is trading at 16.7 times estimated 2023 earnings per share and has a dividend yield of 4.3%.
