With the stock market sinking further into bear territory, many investors are looking for safe and reliable income streams to ride through the turbulence. Dividend stocks can be a great passive income stream, but not all dividend-paying stocks can offer reliability and safety in their payments over the long term.
Three stocks that are built to withstand a downturn and continue paying high-dividend yields for years are Digital Realty Trust (DLR +0.78%), Realty Income (O +0.58%), and W.P. Carey (WPC +1.24%). Let's take a closer look at each company and why these stocks are fantastic buys right now, particularly if we enter a recessionary period.
Digital Realty Trust: A solid play in the data center industry
Digital Realty Trust is one of the leading global data center providers. It owns and leases roughly 300 data center facilities on six continents and in 50 different metropolitan areas. It's the eighth largest publicly traded real estate investment trust (REIT) by market capitalization and one of the purest plays investors can make to gain exposure to this fast-growing industry.
NYSE: DLR
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Its stock, which is down 45% this year, is getting battered for a number of reasons: General market volatility, manufacturing shortages hindering the production of certain parts needed to operate data center facilities, and pessimism for the near-term outlook for the data center industry.
While it certainly faces short-term headwinds, long-term outlooks for data centers look incredibly strong. Digital communication drives data center demand and that's likely to increase despite an economic recession. The company's most recent quarterly earnings showed its leasing momentum was high, and roughly half of its in-development projects are already pre-leased. Its core metrics, including revenue and funds from operations (works similarly to earnings), all grew year over year.
The REIT is trading for its lowest price in over five years while offering a dividend yield of around 5% -- which is virtually unheard of for data center REITs. Plus, Digital Realty has a tremendous track record, raising its dividends 17 years in a row. It also boasts a healthy balance sheet which should allow the company to maintain and raise its dividend, even in the event of a slowing economy.
Realty Income: Safety through net leases
Most REITs that own commercial real estate use triple net leases (NNN). These long-term real estate contracts place virtually all of the responsibilities of owning and managing a property on the tenants. A large, diversified portfolio of properties using this lease structure generates consistent income streams. And Realty Income is the leader in net leases.
Aside from being the largest net lease REIT, with over 11,000 properties in its portfolio, it's also a Dividend Aristocrat and a monthly dividend-paying REIT. The company has raised its dividends 117 times since 1994 and it currently pays a dividend yield of 5%, three times higher than the S&P 500.
NYSE: O
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Realty Income primarily owns and leases retail properties to big-name tenants, but it's quickly diversifying its portfolio through its recently completed acquisition of VREIT and the purchase of Encore Hotel and Casino from Wynn Resorts. High inflation and slowed economic spending are likely to affect the retail industry, but I'm not overly concerned about how this will affect Realty Income.
With $3.25 billion in cash and cash equivalents, it has more than enough liquidity to cover its near-term debt maturities. And considering that the company has been in operation for over 53 years, this is hardly its first downturn to work through. According to its latest earnings report, its revenues, core funds from operations (FFO), and net income are all up notably. Its ability to withstand today's market challenges and its fantastic track record of dividend growth makes it a no-brainer buy right now.
W.P. Carey: The leader in diversification
Looking for more diversification within the net lease industry? Look no further than W.P. Carey, the leading diversified net lease REIT, which owns over 1,300 different commercial properties. Instead of focusing on one core asset class like Realty Income or Digital Realty Trust, W.P. Carey has a unique mix of warehouses and industrial space, self-storage, office, retail, hotels, and other commercial properties in the U.S. and Europe.
It uses opportunistic investments to drive its portfolio growth, expanding in fast-growing high-demand industries and markets regardless of the asset class. This diversification has helped it ride out turbulent times in the past while maintaining slow but steady growth year over year.
NYSE: WPC
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Thanks to its recent merger with Corporate Property Associations 18 (CPA18), its dividend looks to be on even better ground. The acquisition helped diversify its portfolio further, lowering its retail exposure to 20%. Retail accounts for the largest portion of its annual base rents (ABR). The immediate effect of the merger should be reflected in its upcoming earnings report. However, its pre-merger performance was still strong, with its portfolio being nearly 100% occupied.
Today, investors can lock in a nearly 6% dividend yield by purchasing shares of W.P. Carey with peace of mind, knowing it's a passive income stream that should keep growing. Its dividend payout ratio is 83.5%, so the REIT should have no issue maintaining its fantastic track record of 25 years of consistent dividend growth.
