This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Income investors are typically interested in stocks with reliable and secure dividends, even during recessions.
Real Estate Investment Trusts, or REITs, can be a good choice for income investors, as their real asset business offers inflation protection and often trade with higher yields than most other sectors. In this article, we will highlight three REITs that look strong from an income and safety perspective.
Digital Realty (DLR)
Digital Realty Trust is a leader in buying and developing properties for technological uses. Digital Realty’s properties are a combination of data centers that store and process information, technology manufacturing sites and Internet gateway datacenters which allow major metro areas to transmit data. The company operates over 300 facilities in 28 countries on six continents.
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The company reported first-quarter results in which revenue came in at $1.3 billion, a 19% increase compared to Q1 2022. During the quarter, the company generated $1.66 in core FFO per share compared to $1.67 per share prior. Digital Realty also updated its 2023 guidance, and now anticipates $5.5 billion to $5.6 billion in core FFO.
Since 2010 Digital Realty increased its FFO-per-share by an average compound rate of 6.1% per year. Acquisitions are a major component of Digital Realty’s growth. For example, in 2017, Digital Realty completed its purchase of DuPont Fabros Technology, a REIT that leased properties to some of the largest tech companies in the world. Companies like Microsoft (MSFT) and Facebook (FB) are then free to build their own data centers within the properties. In 2020 Digital Realty acquired Interxion, a provider of cloud data centers in Europe.
Digital Realty has increased its dividend for 17 consecutive years. The stock has a 4.2% dividend yield. With a dividend payout ratio of approximately 73% of projected FFO for 2023, the dividend is relatively safe. Digital Realty’s chief competitive advantage is that it is among the largest technology REITs in the world. This gives the REIT a size and scale advantage that competitors have difficulty matching. In addition, the company has proven to be able to utilize its balance sheet to fund acquisitions in order to grow FFO and revenues.
Essex Property Trust (ESS)
Essex Property is a multifamily residential REIT that primarily invests in West Coast markets. With more than 60,000 apartments, Essex Property is one of the largest publicly traded residential REITs. Demand for apartments isn’t cyclical, as people need a place to live in every economic environment. This has caused Essex Property’s results to be very resilient in the past -- FFO declined by less than 5% during the pandemic, for example.
In the 2023 first quarter, Essex reported Funds From Operations (FFO) of $3.65 per share, surpassing expectations by $0.04. They achieved strong same-property revenue and net operating income (NOI) growth of 7.6% and 9.2%, respectively, compared to the first quarter of the previous year. The company increased its dividend by 5.0%, resulting in an annual distribution of $9.24 per common share. This marks the 29th consecutive annual increase in dividends.
Rising property prices have resulted in steady growth for Essex Property’s net asset value, and between rent increases and the development of new properties, Essex Property has managed to deliver a solid 8% annual FFO-per-share growth rate over the last decade.
These regular increases in the company’s funds from operations have been shared with the company’s owners, as Essex Property has reliably increased its dividend over time. In fact, the company has increased its dividend annually for 29 years in a row, making it a Dividend Aristocrat.
Neither the pandemic nor the bursting of the housing bubble around 15 years ago forced the company to reduce its payout.
This encouraging dividend growth history, combined with a dividend payout ratio of just 61%, makes us believe that there is little risk of a dividend cut going forward. The trust also has a strong balance sheet with a solid BBB+ credit rating and currently has a very healthy interest coverage ratio and Net debt to adjusted EBITDA ratio. At current prices, Essex Property offers a dividend yield of 4.0%, which is above the yield it has traded at over most of the last decade.
Realty Income (O)
Realty Income is a retail REIT. Its triple-net leases mean that its operating costs are very low, and since it primarily invests in resilient standalone assets that are occupied by grocers, dollar stores, and so on, it has fared very well in the past, despite the growth of e-commerce that has been a problem for some other retail REITs, such as those investing in lower-quality malls.
Realty Income has a strong track record when it comes to growing its funds from operations as well as its dividend. FFO-per-share has risen by 7% a year over the last decade and was up during every single year in that time frame -- even during the pandemic, FFO-per-share continued to climb.
In the 2023 first quarter, the company’s net income available to common stockholders was $225.0 million, equivalent to $0.34 per share. Normalized FFO per share increased by 2.0% to $1.04 compared to the same period last year. Adjusted Funds From Operations available to common stockholders was $650.7 million, or $0.98 per share.
Future growth will be driven by rental increases at existing properties, as well as new properties. In the most recent quarter Realty Income invested $1.7 billion in 339 properties and properties under development or expansion. The initial weighted average cash lease yield for these investments was 7.0%.
Realty Income has increased its dividend for 26 consecutive years. Like Essex, Realty Income is a Dividend Aristocrat. At current prices, Realty Income is trading with a dividend yield of 5.1%. Realty Income’s dividend payout ratio is 78%, based on the company’s guidance for this year’s FFO-per-share. We believe that the dividend is very safe, based on Realty Income’s strong track record, recession resilience, and also due to the fact that its dividend payout ratio actually declined over the last decade, despite annual dividend increases.
