Although many companies have excellent track records of paying dividends, others don't. Because of that, dividend-focused investors need to ensure any company they invest in can pay an enduring dividend.
AvalonBay Communities (AVB 0.35%), Realty Income (O -0.15%), and Crown Castle (CCI -0.54%) have proven dividend track records. That's one of several factors that give a few Fool.com contributors high conviction that these companies can keep paying dividends for decades to come.
Apartments are always in demand
Matt DiLallo (AvalonBay Communities): Demand for apartments tends to grow steadily. People always need a place to live. That should benefit AvalonBay Communities, one of the country's largest residential landlords. The apartment real estate investment trust (REIT) has interests in 294 apartment communities across a dozen states, including 18 under development.
The REIT generates relatively steady rental income that rises over time. In addition, the company is investing in developing and acquiring new apartment communities. While most of its focus is on properties in high-cost coastal gateway cities like New York and Los Angeles, the REIT has been expanding into faster-growing markets across the Sun Belt region, such as South Florida, North Carolina, and Texas. Those new additions help increase its rental income.
AvalonBay's dual growth drivers have enabled the REIT to steadily increase its dividend, which currently yields almost 4%. Although it hasn't given investors a raise every year, it has increased the payout at a 5% annualized rate since its initial public offering, including by 3.8% earlier this year. That payout is on rock-solid ground. AvalonBay has a low dividend payout ratio of less than 70% of its funds from operations (FFO) and a strong investment-grade balance sheet with leverage below its target level. That gives it lots of flexibility to raise the dividend and expand its portfolio of properties.
With demand for apartments extremely durable, AvalonBay should continue generating steadily rising rental income. That gives me high conviction that investors can continue collecting dividends from the REIT for years to come.
Realty Income is a safe haven in a recession
Brent Nyitray (Realty Income): Realty Income focuses on single-tenant real estate properties. It is a highly defensive stock that has been around since 1969 and has raised its dividend consistently though many tough economic cycles. During 2020, Realty Income hiked its dividend three times despite the lockdowns and economic slump that caused many REITs to cut their dividends. Although the current economy is strong, the Federal Reserve's campaign of aggressive rate hikes to stifle inflation may tip the economy into a recession later this year. During a recession, Realty Income will be one of the safer places to wait out the storm.
Realty Income owned or held an interest in 12,237 properties and reported a 99% occupancy rate as of Dec. 31. The portfolio of tenants is highly defensive, with 10% of rent coming from grocery stores, 8.6% coming from convenience stores, and 7.4% from dollar stores. Even during a recession, people still buy groceries, snacks, and general consumables.
Realty Income uses an unusual lease structure called a triple net lease. This means that the tenant is responsible for almost all expenses including rent, taxes, insurance, and maintenance. These leases generally have terms of a decade or longer and are notoriously expensive to break. This means that Realty income's vetting process must be robust, with clients that have reliable cash flow and multiple revenue sources and that are large owners of real estate.
Realty Income is trading at 15.5 times 2022 funds from operations per share and has a dividend yield of 4.9%. It has been a steady dividend payer and should be a core holding for an income investor or a conservative investor in general.
This cell tower titan has the history and future for a convincing buy
Marc Rapport (Crown Castle): Crown Castle shareholders have reaped the benefits -- and dividends -- of owning a key piece of the infrastructure that underpins the digital revolution. And the hits should just keep happening.
This REIT boasts the largest collection of wireless communications real estate in the country, currently at more than 40,000 cell towers, 85,000 route miles of fiber-optic cable, and 120,000 small cell nodes. The company is also investing in edge computing: mini-data centers that help extend the ability to handle the growing number of devices that depend on internet connectivity, from smart cities to smartphones.
The chart below shows Crown Castle's total return since it became a REIT in 2014 compared with Vanguard S&P 500 ETF and how much its dividend has increased since then compared with that benchmark exchange-traded fund. The stock yields about 4.7%, compared with about 1.7% for the S&P 500.
CCI Total Return Level Data source: YCharts
REITs are required by law to pay out at least 90% of their taxable income as dividends, and the company has consistently pledged to continue raising its payout by 7% to 8% a year. Crown Castle has, in fact, raised its dividend by an annualized 9.3% for the past three years while racking up eight straight years of increases.
Crown Castle has been around since 1994 and has established an impressive presence in one of the defining growth industries of our time. There's good reason to invest with conviction that this REIT will continue to produce nice returns for years to come.
