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2 Wonderful Dividends To Buy For A Weakening Economy

Two Wonderful Dividend Stocks to Buy Amid a Weakening Economy

In an economic landscape increasingly fraught with uncertainty, investors are turning their attention to resilient dividend-paying stocks that can weather potential downturns. As indicators point toward a weakening economy—marked by slowing growth, persistent inflation pressures, and geopolitical tensions—defensive plays become paramount. This analysis delves into two standout dividend stocks that not only offer attractive yields but also demonstrate strong fundamentals capable of thriving even in challenging times. These selections are grounded in their proven track records, robust business models, and ability to generate consistent cash flows, making them ideal for income-focused portfolios seeking stability.

The broader economic context sets the stage for why such investments are timely. Recent data suggests a slowdown in key sectors, with consumer spending showing signs of fatigue amid high interest rates and elevated living costs. Manufacturing activity has contracted in several reports, and corporate earnings forecasts are being revised downward. In such an environment, stocks tied to essential services or recession-resistant industries tend to outperform. Dividends, particularly those from companies with histories of payout growth, provide a buffer against volatility, offering investors a steady income stream while capital appreciation potential remains intact. The two stocks highlighted here exemplify this strategy: they are from sectors that historically hold up well during economic weakness, boasting high yields, low payout ratios, and defensive moats.

The first recommended stock is Realty Income Corporation (NYSE: O), often dubbed the "Monthly Dividend Company" for its consistent payouts. Realty Income is a real estate investment trust (REIT) specializing in single-tenant, freestanding retail properties leased to creditworthy tenants across various industries. Its portfolio is diversified, with exposure to essential retail like drugstores, convenience stores, and discount retailers—businesses that remain operational regardless of economic cycles. This defensive positioning is crucial in a weakening economy, where discretionary spending may decline, but necessities persist.

What makes Realty Income particularly appealing is its impressive dividend history. The company has increased its dividend for over 25 consecutive years, currently yielding around 5.5%, which is well above the S&P 500 average. This yield is supported by a funds from operations (FFO) payout ratio that hovers in the mid-70% range, indicating sustainability and room for future growth. In a downturn, Realty Income's triple-net lease structure shifts most operating expenses to tenants, minimizing the REIT's risk exposure. For instance, during the 2008 financial crisis and the COVID-19 pandemic, the company maintained high occupancy rates above 98% and continued dividend payments without interruption. This resilience stems from long-term leases with built-in rent escalators, ensuring predictable revenue streams.

Financially, Realty Income has shown robust growth. Its adjusted FFO per share has compounded at an annual rate of about 5% over the past decade, driven by strategic acquisitions and portfolio expansions. Recent moves, such as the merger with VEREIT, have bolstered its scale, creating a $50 billion-plus enterprise with over 13,000 properties. This scale provides negotiating power with tenants and access to capital markets at favorable rates. Valuation-wise, the stock trades at a forward price-to-FFO multiple of around 14-15x, which appears reasonable compared to historical averages and peers. Analysts project mid-single-digit FFO growth in the coming years, supported by organic rent increases and accretive deals. Risks, such as interest rate sensitivity common to REITs, are mitigated by Realty Income's conservative balance sheet, with debt-to-EBITDA ratios below 6x and ample liquidity.

Shifting focus to the second stock, EPR Properties (NYSE: EPR) offers another compelling dividend opportunity in the experiential real estate space. EPR is a REIT focused on properties tied to entertainment, recreation, and education—think movie theaters, ski resorts, golf entertainment complexes, and charter schools. While this might seem counterintuitive in a weakening economy where leisure spending could falter, EPR's portfolio is strategically positioned with recession-resistant elements. For example, its education segment, comprising charter schools, provides stable, long-term leases backed by government funding, which remains steady even in downturns.

EPR boasts a dividend yield exceeding 7%, making it one of the higher-yielding options in the REIT universe. Like Realty Income, it has a history of reliable payouts, though it did suspend dividends briefly during the height of the pandemic due to theater shutdowns—a move that was prudent and allowed for a strong rebound. Post-recovery, dividends have been reinstated and grown, with the current monthly payout reflecting confidence in cash flow generation. The payout ratio based on adjusted FFO is around 80%, leaving headroom for sustainability.

The appeal of EPR lies in its niche focus on "experiential" assets, which have shown pent-up demand post-COVID. Movie theaters, a significant portion of its portfolio, are benefiting from blockbuster releases and a return to in-person entertainment. Partnerships with top operators like AMC and Regal ensure high-quality tenants. Moreover, diversification into non-entertainment areas, such as Topgolf venues and early childhood education centers, adds layers of defense. In a weakening economy, while luxury experiences might dip, affordable entertainment often sees increased demand as consumers seek low-cost escapes from daily stresses—a phenomenon observed in past recessions.

From a growth perspective, EPR has been actively managing its portfolio, divesting non-core assets and reinvesting in higher-return opportunities. Recent quarterly results have shown occupancy rates climbing back to pre-pandemic levels, with FFO growth in the double digits year-over-year. The company's balance sheet is solid, with a net debt-to-EBITDA ratio under 6x and significant undrawn credit facilities. Valuation is attractive, with shares trading at a forward P/FFO multiple of about 10-11x, suggesting undervaluation relative to growth prospects. Analysts anticipate continued recovery, with potential for dividend hikes as theater attendance normalizes and new developments come online.

Comparing the two, Realty Income offers more stability with its essential retail focus, appealing to conservative investors, while EPR provides higher yield potential with some cyclical upside, suitable for those willing to tolerate moderate volatility. Both benefit from the REIT structure, which mandates high dividend distributions (at least 90% of taxable income), ensuring income reliability. In a weakening economy, their ability to generate free cash flow and maintain dividends positions them as "wonderful" buys—borrowing from Warren Buffett's terminology for businesses with enduring competitive advantages.

Investors should consider broader risks, such as prolonged high interest rates impacting borrowing costs or sector-specific headwinds like streaming competition for theaters. However, these stocks' histories suggest they can navigate such challenges. For portfolios emphasizing total return through dividends and modest capital growth, allocating to Realty Income and EPR could provide ballast against economic headwinds. As the economy softens, prioritizing quality dividends over speculative growth becomes a prudent strategy, and these two exemplify that approach.

In conclusion, amid signs of economic weakening, Realty Income and EPR Properties stand out as dividend powerhouses. Their high yields, sustainable payouts, and defensive business models make them worthy additions to income-oriented portfolios. By focusing on essentials and experiences that persist through cycles, these REITs offer not just income but also potential for long-term appreciation. Investors eyeing stability in uncertain times would do well to consider these selections, balancing yield with resilience for a well-rounded defensive stance. (Word count: 1,048)

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[ https://seekingalpha.com/article/4808396-2-wonderful-dividends-buy-for-weakening-economy ]