The effects of the COVID-19 pandemic vary by sector, but some stocks have had their share prices knocked down even though the businesses themselves aren't taking the hit investors have priced in.
For dividend investors, that creates a double opportunity: to get an unusually high yield, and for potential appreciation in the share price. The two businesses below are each yielding between 4.5% and 5%, with share prices still down approximately 20% for the year. But digging into the details indicates the underlying businesses remain strong, and investors today could reap the benefits of a price correction.
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Its tenants are open for business
When the pandemic forced many businesses to close to help slow the virus spread, investors dumped just about anything in the retail sector. Real estate investment trust (REIT) Realty Income (NYSE: O), owner of over 6,000 retail properties throughout the country, saw its share price plummet by over 50% from its February highs. This might seem to make sense, as over 84% of its income from rent is generated by retail properties.
But those properties are mostly in essential industries that remained open during the pandemic. The top four industries of its tenants are convenience stores, drugstores, dollar stores, and grocery stores, representing over one-third of total rent. As these businesses remained open and even accelerated sales during the pandemic, Realty Income did not take the hit that some other retail landlords did. For the second quarter, ending June 30, the company collected 85.4% of its contracted rents across its portfolio.
And because the company has increased its dividend every year for 25 straight years, Realty Income is a Dividend Aristocrat. The dividend, which is paid monthly, currently yields about 4.9% since the share price has only regained a portion of what it lost at the height of the pandemic sell-off. A strong tenant base has proved itself through this sharp recession and pandemic crisis, and the company's funds from operations (FFO) per share (the equivalent of income for a REIT) are as high as they have been in more than 10 years. Now is a good time for investors seeking a reliable dividend to buy into Realty Income.
Safety equipment needed
Another sector hit hard by the economic shutdown is industrial companies. But whether they were deemed essential enough to continue operating, or are planning to restart factories, every manufacturer now needs an influx of safety equipment and cleaning products. Industrial supplier MSC Industrial Direct (NYSE: MSM) reported fiscal third-quarter earnings on July 8, and it beat analyst expectations on sales and income.
The company said it saw "unprecedented demand for all personal protective equipment (PPE) and worker wellness products" in the quarter, ending May 30. And now that many businesses are reopening, the strong demand for safety and janitorial supplies should continue to somewhat offset lower demand from manufacturers that are only gradually getting back to pre-crisis production levels.
This business fundamentally needs a growing economy and a strong manufacturing sector to prosper. If the economic downturn persists, the additional pandemic-related sales won't be able to supply that prosperity. But a long-term investor willing to hold an industrial supplier through the peaks and troughs can get a 4.6% yield from MSC right now.
Under the radar
The ability of both Realty Income and MSC Industrial Direct to navigate the current difficult environment hasn't been reflected in a rebound in their share prices. The resulting dividend yields are a gift for investors who are content with the underlying businesses in the long run. MSC Industrial may have more headwinds since it relies on a strong economy, but investors are now being paid well to hold through the cycles. And Realty Income has proved itself to be a stalwart in its field, and royalty among dividend payers.
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