Best Types of REITs for Recessions
Many dividend investors are conservative by nature. They aren’t worried about trying to beat the market but are instead focused on generating safe, growing income while preserving their capital. For this reason, they like to focus on companies that have reliably grown their dividends over time. Dividend aristocrats are one such group of businesses, and a full list of these stocks can be seen here.
The financial crisis decimated many retirement accounts, and it’s important that we never forget the painful lessons it taught us. Many of these lessons are incorporated into our Dividend Safety Scores (link below) to help us avoid making the same mistakes.
The last recession was filled with surprises. Many iconic dividend growth stocks proved to be vulnerable. From General Electric Company (NYSE:GE) to Bank of America Corp (NYSE:BAC), there was no shortage of surprises.
During recessions, some businesses perform much worse than others because demand for their products and services is primarily driven by the health of the economy. Unfortunately, many economy-sensitive businesses happen to be major tenants for certain REITs.
Real estate took a big hit during the financial crisis, and many REITs were clobbered. However, some performed better than others and nicely preserved investors’ capital while continuing to provide safe dividends.
The chart below shows the total return of each REIT group in 2007, 2008, and 2009. REITs with more cyclical tenants, such as hotels, experienced a 22% loss in 2007 and a whopping 60% drawdown in 2008. While they did rebound 67% in 2009, this type of volatility isn’t exactly what every retired income investor dreams of.
Mortgage REITs were also walloped with losses in excess of 30% in 2007 and 2008, and industrial and retail REITs weren’t much better.
Fortunately, several types of REITs were not as impacted by the recession. Health care REITs were up 2% in 2007 and recorded a more modest loss of 12% in 2008. They also participated in the market’s rebound in 2009 with a 25% return. People continue to need many health care services regardless of how the economy is doing, which can make for more stable occupancy levels and rental rates for these REITs.
Self storage REITs lost 25% in 2007 but held their ground very well in 2008 with a 5% return. It’s a pain to move things in and out of storage. Items are usually stored for a reason, and storage companies usually have an easier time raising prices on their customers. This, in turn, makes them reliable tenants with fairly predictable demand.
Source: Simply Safe Dividends, REIT.com
In addition to the drop in many REITs’ stock prices, dividends also proved to be quite vulnerable during the recession.
From May 2008 through March 2009, approximately 30% of all REITs suspended, cut, or switched to paying part of their dividend in company stock, according to The Wall Street Journal.
REITs’ relatively high payout ratios and dependence on raising equity and debt to fund their business needs got them into trouble during the credit crisis when capital was hard to come by.
While no one can predict when the next recession will occur, many investors are feeling cautious about another risk – rising interest rates.
