As sure as Spring turns to Summer, it was a foregone conclusion that the vigorous economic rebound and raging bull market from last year would come to an end, eventually.
As it so happens, this shift from economic strength to weakness, from bull to bear, began right as the calendar turned from 2021 to 2022. Year-to-date, the S&P 500 (SPY) is down over 13%, the Nasdaq (QQQ) down over 21%, and REITs (VNQ) are down a little over 10%.
The latest drawdown, which featured a 3.6% drop in SPY and a nearly 4.2% drop in QQQ on Friday April 29th, has put these two stock indexes at their lowest point of the year.
In fact, both the SPY and (especially) the QQQ have plunged decisively through their 200-day simple moving averages (“SMAs”).
While I believe markets are moved by fundamentals rather than the chartmasters’ technical wizardry, it is interesting to note the bearishness of stock indexes falling this far below their 200-day SMAs. Usually, this is a “look out below” signal, corresponding to some kind of economic shock that sends stock prices spiraling downward with no bottom in sight.
Of course, there always is a bottom, but without the comforting safety net of being above the 200-day SMA, and amid the chaos of economic uncertainty, there’s no telling where it will be.
Now, I am not necessarily predicting another stock market crash ala Fall 2008 or Spring 2020. Maybe we have already reached the bottom. I am merely commenting that the storm clouds above us look bad, not trying to say that they will get worse or prognosticating about when they will pass.
Speaking of storm clouds, we got a glimpse of the surprising weakness in the economy when Q1 2022’s GDP estimate was released recently showing a 1.4% decline in annualized real (inflation-adjusted) GDP. This even as the CPI averaged nearly 8% during the quarter.
This -1.4% real GDP reading was surprising because of the expectation that it would come in at 1%. But, in retrospect, it shouldn’t be that surprising given the persistent supply chain snarls, COVID lockdowns in China, war in Ukraine, and depletion of pandemic-era stimulus money.
Personal savings continue to decline further and further after being massively boosted by the three rounds of economic impact payments (aka “stimmy checks”) during the pandemic. At this point, personal savings are lower than the ~$1.3 trillion number from January 2020.
The tailwind of artificially high consumer demand is over.
And now, the world faces a surfeit of economic problems ranging from a massive container ship traffic jam in Shanghai to smoldering wheat fields in Ukraine to a burgeoning food crisis in the Middle East and stagnant oil production while energy prices are near their highest level ever.
What is an investor to do amid this troubling backdrop? I offer two suggestions:
- First, invest incrementally. Don’t try to time the bottom. There are too many economic variables at play, too many uncertainties, too many potential black swans yet to manifest, to know exactly when the bottom will come. Just buy the stocks you want to buy when they look like a good value. Don’t try to be a genius. If you think you’ve thought two steps ahead of the market, you’ll often eventually find out that the market has thought three steps ahead of you.
- Second, I will reiterate what Jussi Askola and I argued recently in “Warning Signs of a ‘Lost Decade‘”: Focus more on dividend income than expected capital appreciation as your primary source of returns going forward.
As we pointed out in that article, decades of strong stock market performance are typically followed by weaker decades, with the unique exception of the 1980s and 1990s, when falling interest rates boosted cheaply valued stocks. During decades of lower appreciation, dividends tend to make up a much larger portion of total returns.
During the high inflation years of the 1970s, for instance, dividends made up 73% of total returns.
Given rich stock valuations, I would surmise that we may be in for a similarly difficult decade for total returns wherein a large portion of those returns come from dividends.
As such, let’s look at five dividend stocks that look like great buys today.
1. AT&T (T)
- Dividend Yield: 5.89%
This descendent of Alexander Graham Bell’s original telecommunications company needs no introduction. After greatly increasing debt levels for expensive acquisitions of DirecTV and TimeWarner Media, T’s management decided to unwind those bad deals in order to get back to the company’s telecommunications roots.
Now that WarnerMedia has been spun off and combined with Discovery into Warner Bros. Discovery (WBD), T has become a pure-play telecom company again, much akin to its major rival, Verizon Communications (VZ).
Given T’s major changes as of late, not to mention the ~40% dividend cut shareholders suffered after 26 consecutive years of dividend growth, what makes T the better buy today than VZ?
For one thing, valuation.
Compared to VZ’s P/E ratio of 8.6x, T sports a lower P/E ratio of 7.4x. Likewise, compared to VZ’s dividend yield of ~5.5%, T yields ~5.9%. And T offers this higher dividend yield along with a slightly lower payout ratio of 43%, compared to VZ’s 47%.
Moreover, T has put up more impressive performance numbers as of late. In 2021, T showed the highest postpaid phone net additions of any telecom company at 3.2 million, which is also higher than the company’s previous 10 years of net additions combined. Likewise, in Q1, T’s postpaid net adds came in at the highest level for a first quarter in over ten years. The company did this, CEO John Stankey insists, without offering special deals or lower-than-market rates.
Meanwhile, VZ’s numbers have been much weaker, as presumably some of its customers are switching over to T as their provider.
Now that T has shed its entertainment business, the company is free to invest more of its tens of billions in cash flow into its core telecom business, thereby continuing to remain competitive with VZ.
Honestly, though, both companies look like a great value today. Rarely do either become as cheap or high yielding as they are now.
2. CareTrust REIT (CTRE)
- Dividend Yield: 6.79%
CTRE is a real estate investment trust that primarily owns skilled nursing facilities (nursing homes) with some minor exposure to senior housing communities as well. It is one of the most, if not the most, high-quality and conservatively managed senior care REIT on the market.
All of its properties are triple-net leased, which means that the tenant-operator is responsible for all property expenses such as maintenance, insurance, and real estate taxes. This lease model, combined with strong tenant selection, is why CTRE was able to collect 100% of contractual rents throughout the pandemic and up to today.
In 2021, CTRE generated $1.46 in funds available for distribution per share while paying a dividend of $1.06, representing a 72.6% payout ratio.
A big reason why CTRE has sold off nearly 30% this year has been the announcement that the weakest roughly 10% of the portfolio (by NOI) would be sold in order to reinvest in stronger properties and tenants and perhaps even expand into behavioral health facilities / rehab centers.
Much is uncertain right now, but CTRE does boast the lowest leverage ratio of any healthcare REIT, a skilled and shareholder-aligned management team, and a long demographic tailwind. Management demonstrated confidence in the company’s future by boosting the dividend 3.8% in March 2022.
Moreover, third-party data from the Seniors Housing & Care National Investment Center shows that Q1 2022 occupancy at skilled nursing facilities increased 40 basis points quarter-over-quarter while increasing 50 basis points for assisted living. Both are still 7-9 points below their pre-pandemic levels, but the trajectory is in the right direction.
Likewise, rent growth and absorption (on the resident side) are both heading higher, while new deliveries of units cools down, which should allow resident demand to catch up to an oversupplied senior housing & care market.
You can read a fuller investment thesis for CTRE here.
3. Medical Properties Trust (MPW)
- Dividend Yield: 6.31%
Hospital real estate owner MPW has been hit with a raft of negative press recently, from multiple “exposé” articles in the Wall Street Journal arguing that its tenants are weaker than they really are to a Hedgeye short report to analyst downgrades.
With the Q1 earnings release, MPW’s management silenced these criticisms, at least for now. Normalized FFO per share of $0.47 was in-line with analyst expectations, and CPI-based rent escalations created rent growth of 4%.
And Steward Health, MPW’s supposedly troubled largest tenant, was shown to have rent coverage of 2.8x, roughly in line with the average among MPW’s other hospital operators of around 3x.
What’s more, NFFO per share rose 12% YoY, while AFFO per share of $0.37 rose 8.8% YoY. The former uses straight-line rents, which include future rent increases, while the latter uses cash rents. The quarterly dividend of $0.29 represents an AFFO payout ratio of 78.4%.
Measuring by AFFO, MPW is extraordinarily cheap right now, second only to the debt-laden and troubled skilled nursing giant, Omega Healthcare Investors (OHI).
MPW’s CEO owns $76 million in company stock, far more than any other healthcare REIT CEO owns in their respective company.
While MPW is by no means without risk, the level of fear generated from negative press recently is unwarranted, making now a good time to buy the stock.
4. NextEra Energy Partners (NEP)
- Dividend Yield: 4.4%
NEP, the renewable energy YieldCo of utility giant and renewables developer, NextEra Energy Inc. (NEE), recent reported a strong first quarter earnings and hiked its dividend by 3.5%.
The company has been hiking its quarterly dividend around this rate since 2014, amounting to an average annual dividend growth rate of 12-15%. Management believes that this same dividend growth rate can be sustained through at least 2024 because of the parent company’s massive development pipeline.
In short, NEP makes money by buying stabilized, long-lived renewables assets from NEE or third parties at an attractive spread above its cost of capital. Most of its investments come from the parent company, who sells (or “drops down”) stabilized renewables assets to NEP in order to raise funds for future development projects. Rinse and repeat.
Right now, both NEP and NEE have sold off hard over fears that the US Department of Commerce will raise tariffs on solar panels imported from Southeast Asia, where some 80% of the nation’s installed panels come from. This is part of the DoC’s anti-dumping investigation, which is ongoing and has not been resolved yet.
If the DoC does raise tariffs on these solar panel imports, it will significantly disrupt the supply chain and delay the completion of future projects. Already, many solar projects are being delayed amid the uncertainty.
Fortunately, NEE is a diversified renewables developer and able to deftly switch to greater wind development while waiting for the DoC investigation to conclude. There should be no shortage of future development projects in one area or another and thus no shortage of renewables assets available to be dropped down to NEP.
You can read a fuller investment thesis on NEP here.
5. Whitestone REIT (WSR)
- Dividend Yield: 3.95%
I recently pitched WSR in “Why I Sold UDR And Where I Reinvested The Proceeds,” so I will make my case here brief.
WSR is a retail REIT that owns high-quality shopping centers in five red-hot Sunbelt markets: Dallas, Phoenix, Houston, Austin, and San Antonio. These centers are well-located in high-income and highly educated areas.
The problem is that WSR has been mismanaged in the past by an overpaid CEO, who was recently fired by the board with cause. The new CEO, David Holeman, is committed to deleveraging from the currently high net debt to EBITDA ratio over 8x as well as producing positive per-share performance going forward.
Holeman plans to do this by lowering management salaries to a more reasonable level and focusing on leasing up the portfolio, which has a below-average occupancy rate of 91.8%.
The dividend was reduced during the pandemic, when the previous CEO was still in charge, but the new annualized dividend of $0.48 makes up less than half of expected core FFO per share of $1.00 for 2022, leaving plenty of room for future dividend growth.