You can’t have a discussion about investing in 2020 without talking about 5G. But honestly, that’s not the reason to consider AT&T (NYSE:T) as a great dividend stock. AT&T has a massive dividend yield of over 5.5%. The company can support the dividend because it has a wireless subscriber base of over 150 million consumers.
Wireless communications make up the bulk of AT&T’s revenue and earnings. And while that isn’t changing, it may be getting supplemented now that it is entering the streaming space now that it has completed its merger with Time-Warner. Some analysts are concerned that AT&T may be late to the streaming game and others point to DirecTV as a dying business model. But neither of those issues should affect the company’s ability to generate free cash flow. This means AT&T should be able to pay down the debt from these acquisitions while still providing and increasing its dividend, which the company has done for 35 years.
Overall, AT&T seems like a business that will remain relevant for many years. The firm enjoys a solid economic moat due to its ability to provide customers with their video, data, content, and communication needs anytime, anywhere, and on any device. Few companies have the financial firepower and brand strength to effectively compete.
However, the telecom and media industries, as well as consumer preferences, are constantly evolving, making incremental earnings growth more challenging for the large incumbents.
Ratings Breakdown:9 Buy Ratings, 15 Hold Ratings, 1 Sell Ratings.
Consensus Price Target:$38.02 (22.1% Upside)
Realty Income (O)
Sector: Real Estate Industry: Retail REIT
Recession Return: S&P 500 lost 55% from 2007 – 2009; O shares lost 43%
Dividend Growth Streak: 24 years
Realty Income is America’s largest triple net lease REIT with a highly diversified portfolio of nearly 5,500 retail, industrial, office, and agricultural properties in 49 states and Puerto Rico, leased to 257 tenants in 48 industries.
The company enjoys a very profitable business model because its tenants sign long-term leases (the average remaining lease term is around 9 years) and agree to pay for maintenance, property taxes, and insurance.
Further increasing the security of its cash flow and dividend is management’s focus on highly recession resistant tenants (75% of rent) as well as those in experiential and e-commerce resistant industries. In total, Realty Income estimates that 94% of rent is not at risk during a recession or from the increasing popularity of online retail.
And because of its focus on durable tenants and high quality locations, Realty Income enjoys excellent occupancy which has never fallen below 96.6%, even during the Great Recession.
Due to its low-risk business model, Realty Income has been able to grow its dividend every quarter since its IPO (24 straight years), putting it on track to become a dividend aristocrat in 2019. Impressively, the REIT has also been able to grow its adjusted funds from operations per share in 21 of the last 22 years, even during the worst economic downturn since World War II.
In addition, Realty Income’s stock enjoys relatively low volatility and only fell 43% during the Financial Crisis. That may not sound like a low volatility stock, but keep in mind that the financial crisis was rather unique.
Unlike most recessions, in which credit markets continue to function normally, during the Great Recession the seizing up of debt markets hit REITs especially hard, forcing many to cut dividends in order to preserve cash.
As a result, the average REIT lost 64% from October 2007 through March 2009 while the S&P 500 crashed 55%. Realty Income’s 43% drop was one of the smallest in the sector.
Overall, it’s hard not to like Realty Income’s business. The company owns thousands of retail locations that continue holding their ground in the digital age. Management runs the business with a conservative capital structure. And the property portfolio is well diversified by tenant, industry, and geography while enjoying solid cash flow visibility thanks to its long-term net leases.
Looking ahead, Realty Income should have plenty of opportunities to continue expanding its portfolio as well. The total size of the single-tenant retail property market is estimated to be approximately $1 trillion, according to National Retail Properties. Realty Income’s revenue sits near $1.5 billion, leaving plenty of room for future expansion.