It's important for income investors to realize that just like the rest of the stock market, there is a broad spectrum of risk and stability when it comes to dividend stocks. Some high-yielding dividend stocks could have struggling businesses and unstable income, so it's important to focus on companies that have resilient and sustainable income streams, especially with most experts calling for a recession in the not-too-distant future.
Three companies in particular whose businesses (and dividends) should hold up quite well no matter what the stock market or U.S. economy does are Realty Income Corporation (O -0.17%), Public Storage (PSA -0.37%), and Easterly Government Properties (DEA -0.26%).
Retail for tough times
The words "retail" and "recession" don't typically work well together, but Realty Income isn't the typical retail stock. If you aren't familiar, Realty Income is a net-lease real estate investment trust, or REIT, with more than 12,400 properties. About 80% of its rental income comes from retail tenants.
However, Realty Income's tenants are deliberately chosen because they are inherently recession-resistant, not vulnerable to e-commerce competition, or both. Its portfolio mainly consists of non-discretionary retailers like convenience stores that sell things people need no matter what, service-based retailers that have no online-based competitors, and discount-oriented retailers like dollar stores that tend to do even better when times get tough.
The numbers tell the story. Since listing on the New York Stock Exchange (NYSE) in 1994, Realty Income has generated a 14.6% annualized total return, handily outpacing the S&P 500. It has increased its dividend for 103 consecutive quarters, including throughout the dot-com bust, financial crisis, and COVID-19 turbulence, and currently has a 5.1% yield.
A resilient business with low overhead
Leading self-storage operator Public Storage has previously said that it could break even with only 30% of its units occupied.
Public Storage is a highly resilient business, and its management team has a stellar history of shareholder-friendly management that is extremely rare in the real estate industry. For example, it is common practice to issue new stock to raise growth capital, but Public Storage does this very infrequently, choosing to grow mainly with its excess cash flow as opposed to diluting investors. And the company maintains an extraordinarily low debt load for a REIT. In fact, until a few years ago, Public Storage had no debt at all, but management (wisely) decided to take advantage of the near-zero interest rate environment.
While self-storage is often seen as a "boring" business -- and it certainly is, in a lot of ways -- many investors don't realize just how well Public Storage has performed. In fact, with a 7,840% total return over the past three decades (about 16% annualized), it is one of the best-performing dividend stocks in the entire market.
You can't beat this company's tenant reliability
Easterly Government Properties is a real estate investment trust that owns several types of properties, including offices, healthcare facilities, and more. However, all of its properties have one common theme: They are leased to the U.S. government (or government agencies). It owns 86 properties all together, with top tenants that include the FBI, VA hospitals, the Justice Department, the Food and Drug Administration (FDA), and more.
This relationship results in extremely stable income that grows over time. The company's leases generally have annual rent increases built in, and it also develops government properties to meet specific needs. For example, Easterly has a 162,000 square foot property in development for the FDA that it expects to complete in 2025.
To be sure, Easterly is an income-focused investment, and its total returns will likely come mainly from its dividend as opposed to value creation or stock-price appreciation. But with a 7.3% dividend yield and extremely reliable rental income, Easterly could be a great choice for risk-adverse income investors.
These businesses and dividends should hold up
To be perfectly clear, all three of these businesses should perform quite well even if a recession hits. And all three should earn enough money to comfortably cover their dividends no matter what happens in the stock market or economy.
However, I have absolutely no idea what their stock prices will do. If interest rates rise further than expected, a particularly bad recession hits, or other headwinds arise, the stock prices themselves could be rather volatile. But investors can sleep soundly knowing that over the long term, these are solid and resilient companies that should deliver strong total returns.
