Investors who are looking for income should spend some time looking at real estate investment trusts (REITs). Many have long track records of solid performance over many (and varied) economic cycles. Some of the names below have defensive characteristics, which is important if the U.S. is entering a recession. In a recession, for example, history has shown that drug stores and supermarkets will hold up better than retailers that focus on discretionary spending.
Here are three dividend-paying candidates with rock-solid business models that will be a safe port in an economic storm.
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1. Realty Income is a stalwart that has been around for decades
Realty Income (O 0.24%) is a defensive REIT that has a long track record of performance that goes back all the way to the late 1960s. Realty Income increased its dividend every year for over 25 consecutive years. As of Dec. 31, the company had an interest in 12,237 properties with an occupancy rate of 99%. Realty Income's tenant base is relatively defensive, which means their businesses are less sensitive to the overall economy than most. The company's top tenants include Dollar General, Walgreens Boots Alliance, and 7-Eleven.
Realty Income's leases are unusual in that they require the tenant to absorb most expenses including maintenance, taxes, and insurance. These leases are called "triple-net" leases and they generally last a long time and contain automatic escalators. These leases are also expensive to break, so Realty Income has to ensure that any potential tenant can weather good economic times and bad, and it should have a high-quality credit rating. Realty Income was one of the few REITs that didn't cut its dividend during 2020; in fact, it hiked it three times that year. Realty Income has a dividend yield of 4.9% and should be a core holding of an income investor's portfolio.
2. Kimco Realty is another defensive REIT that focuses on necessities
Kimco Realty (KIM -0.59%) is a retail REIT that has been around since the late 1950s. It has 532 properties with 91 million square feet of gross leasable area. The company focuses on open-air shopping centers that are anchored by grocery stores, home improvement stores, or pharmacies. Like Realty Income, it focuses on retailers that supply necessity-based goods and services. The properties are generally located in attractive suburbs surrounding major coastal and Sun Belt cities.
Given the popularity of e-commerce over the past couple of decades, construction for new shopping areas has been restricted. According to at least one estimate, new retail supply is only 0.5% (or one half of one percent) of existing supply and store closures are near record lows. This means that REITs like Kimco have pricing power. Kimco's biggest tenants include TJX Companies, Home Depot, and Albertsons. Occupancy is close to regaining pre-pandemic levels. Rent per square foot is at record levels, and the rent difference between new and expiring leases is the highest in years. Kimco has a dividend yield of 4.8% and is another steady player that an income investor should find interesting.
3. Prologis is a logistics leader benefiting from tight supply
Prologis (PLD 0.17%) is a logistics REIT that benefits from the current tight supply for logistics space. If you drive down any major U.S. artery you will probably see massive structures with truck bays. These are the sort of facilities that Prologis operates. It ended 2022 with 5,495 buildings with a total of 1.2 billion square feet of leasable area. The company has a global network spanning four continents.
Prologis estimates that $2.7 trillion of goods have passed through its distribution centers each year, which corresponds to about 2.8% of global gross domestic product. Occupancy is near full capacity at 98.2%, which allowed Prologis to ask for and get rent increases of 67% on new leases. Prologis is also benefiting from a global increase in corporate inventory as the supply chain disruptions of the COVID-19 pandemic showed the vulnerabilities of extended supply chains. At current levels, Prologis has a dividend yield of 2.9%.
