A Top Pick for Risk-Averse Income Investors
While there are mispriced securities to be explored, it’s hard to deny that markets are mostly efficient. If you want to earn an oversized yield, for instance, you’ll likely have to bear more risk.
And that means, for risk-averse investors who value reliable income the most, sticking to large-cap stocks that don’t yield much might not be a bad idea.
Of course, that may be too much of a generalization, but looking around, there’s some evidence that large, established players often weather the storm better than most.
Take a look at the real estate sector, for instance. Real estate investment trusts (REITs) have been the go-to choice for many income investors. These companies own portfolios of real estate properties and pass the rental income to shareholders in the form of dividends. And because of their pass-through tax structure, REITs have always been the higher-yielding stocks on the market.
Duke Realty Corp (NYSE:DRE) is one of the blue-chip names in the REIT world. The company commands a market capitalization of more than $13.0 billion and is a member of the S&P 500. DRE stock has not been a particularly high yielder, with its annual dividend yield staying below three percent for most of the past 12 months.
And yet, this company has managed to outperform its peers by a substantial margin.
You see, due to the COVID-19 pandemic, the real estate sector has taken a major hit. Year-to-date, the MSCI U.S. REIT Index has returned a negative 19.9%.
Duke Realty stock, on the other hand, is up nearly 10% during the same period.
What’s even better is the cash payment the company gives to shareholders.
As we know, the pandemic has impacted the dividend-paying ability of many REITs. When businesses were shutting down and people were being laid off, commercial and residential tenants both had a hard time coming up with rent. And when rent collection deteriorated, quite a few REITs had to reduce their dividends.
This is where Duke Realty stock stands out among its peers. The company did not cut its dividend, despite the pandemic. As a matter of fact, the REIT’s board of directors recently declared a quarterly cash dividend of $0.255 per share, which represented an 8.5% increase from the prior payout. The new dividend will be paid on November 30 to shareholders of record as of November 16. (Source: “Dividend History,” Duke Realty Corp, last accessed November 5, 2020.)
In other words, the REIT not only delivered solid returns through share-price appreciation, but it’s also giving investors a big “pay raise” in dividend payments.
Of course, Duke Realty’s resilient performance is not due to its large-cap status or low yield. Instead, it comes from a pandemic-proof real estate portfolio.
Why Duke Realty Corp Can Raise Its Payout Despite the Pandemic
You see, Duke Realty does not own any apartment complexes, office buildings, or shopping centers. Instead, the company focuses on industrial properties. Right now, the REIT’s portfolio consists of more than 500 facilities in 20 major logistics markets in the U.S. They total approximately 159 million rentable square feet. (Source: “Supplemental Information Third Quarter 2020,” Duke Realty Corp, last accessed November 5, 2020.)
Industrial properties are nowhere near as fancy as modern shopping malls or skyscraper office buildings. However, they’ve been extremely resilient during this year’s economic downturn. Because of the COVID-19 outbreak, consumers have moved from shopping at physical stores to buying from online vendors. And as a critical component of the e-commerce ecosystem, logistics properties are in strong demand.
To give you an idea, the top three tenants of Duke Realty are Amazon.com, Inc. (NASDAQ:AMZN), United Parcel Service, Inc. (NYSE:UPS), and Wayfair Inc (NYSE:W). They account for 10.0%, 2.5%, and 2.2% of the company’s annualized net lease revenue, respectively.
Because the company’s tenants are doing quite well these days, collecting rent has not been much of a problem. In the second quarter of 2020—a period when a lot of businesses simply could not open because of lockdowns—Duke Realty Corp collected 96.7% of its contractual rent. In the third quarter, its rent collection improved to 98.7%. (Source: Ibid.)
In the REIT’s third-quarter earnings release, Jim Connor, chairman and chief executive officer, said, “Monthly rent collections are strong and the pace of such collections has improved each month from the start of the pandemic. Thus far, we’ve collected more than 99 percent of deferred rents that have come due under revised billing terms, with some tenants even repaying their deferrals in advance to avoid interest charges. Cash bad debt expense for the quarter was essentially zero.” (Source: “Duke Realty Reports Third Quarter 2020 Results,” Duke Realty Corp, October 28, 2020.)
And as you’d expect from a company that raises its dividend during a recession, Duke Realty has no problem covering its payout.
In the third quarter of 2020, the REIT generated core funds from operations (FFO) of $0.40 per share, which actually represented an eight percent increase year-over-year. Considering that the company declared and paid a cash dividend of $0.235 during the quarter, it had a rather conservative payout ratio of 58.8%.
The company’s property portfolio looked solid, too. As of September 30, Duke Realty’s total in-service portfolio was 97% leased, with an average remaining lease term of 5.6 years. Combined with tailwinds from the e-commerce industry, the REIT should continue to generate a predictable stream of rental income.
Looking ahead, Duke Realty has also raised the lower end of its guidance. Previously, management expected the REIT to earn core FFO of $1.48 to $1.54 per share in full-year 2020. Now the projection for full-year core FFO is $1.50 to $1.54 per share. Since the company is on track to pay total dividends of $0.96 per share this year, reaching the guidance range would mean the payout is more than safe.
With DRE stock trading at $37.80 apiece, the REIT’s new dividend rate translates to an annual yield of 2.7%.
As I said earlier, Duke Realty stock is not a high yielder. But with a rock-solid portfolio and growing payouts, the company could be a top pick for conservative income investors.