Let’s not fall in love with our dividend stocks—as this can be a big mistake in a dumpster-fire year like 2022. We must be ready to toss “paper” payer tigers out and move into safe dividends poised to “front run” the next big market shift.

(I’ve got three tickers that are smart plays to swing into now, with yields up to 8.4% and payouts that have surged up to 55% in the last five years, taking their share prices along for the ride.)

“Buy-and-Hopers” Get Crushed

Before we go further, let’s take a moment to keep “buy and hold” investors in our thoughts—or as I like to call them, “buy and hope” investors, who sit tight for years, usually in an index fund, hoping for gains.

These folks have staked it all on share-price appreciation. They have to, with the S&P 500 yielding a paltry 1.4% today.

2022 has blindsided these folks, with the S&P 500 having already erased 13% of their wealth this year. It’s worse for those who’ve dumped their savings into crappy crypto or zero-profit techs:

The NASDAQ Slot Machine: $1 in, 82 cents Out

It’s that group we want to focus on today, because last week’s “NASDAQ nightmare,” which you can see on the right side of the chart above, will likely speed up a change we’ve been following for a while.

That would be a new-found appreciation among our tech fanboys (and girls) for stocks with actual earnings and dividends. That will send them piling into secure payers with built-in inflation hedges.

It’s already starting—and we can see it in real time through the performance of one of our favorite income plays: real estate investment trusts (REITs). The benchmark ETF for the sector, the Vanguard Real Estate ETF (VNQ), has been holding its own in the last month, compared to the NASDAQ:

Gamblers Jump in the REIT Lifeboat

When a chart looks like this, by the way, is when we love to buy in: REITs are showing “relative strength” compared to the NASDAQ. (Relative strength is simply the tendency of a stock, or in this case an asset class, that’s taken off relative to its peers to gap higher still as more folks take note.)

Better still, VNQ yields 2.8% today, more than double the S&P 500 average, and plenty of REITs yield a lot more.

Before we go further, though, let’s talk about one other thing that might give you a bit of pause about REITs: that they don’t do well when interest rates rise. It is true that REITs finance their properties with a lot of borrowed money—but the other (and always neglected) side of this argument is that rising rates come with a growing economy—and that boosts demand for REITs’ properties.

Let’s look back at the last time the Fed hiked rates at a quick pace: from June 2004 to June 2006. In that span, rates shot up from 1% to 5.25%. REITs did just fine:

REITs Soared the Last Time the Fed Went on a Tear

With this in mind, let’s move on to the three tickers I have for you today.

Equinix (EQIX): A Dividend Machine (Unfairly) Swept Up in the Tech Wreck

Of course, we’re not saying we need to avoid all tech stocks—just those with low (or no) profits, and their crypto cousins. Profitable tech plays—especially those with healthy cash flow and soaring dividends—are a great pickup now, with many trading at bargain prices.

Equinix should be near the top of your list. The California-based REIT rents out 237 data centers across 27 countries. Its services will always be in need as firms lean hard into remote work, automation and analytics.

This stock is the opposite of a crypto gamble: Equinix’s revenue has risen for 77 straight quarters. It also has rate protection, with 94% of its debt locked in at fixed rates, with a blended rate of just 1.7% and a term to maturity of nine years.

The crypto crowd, of course, has missed all of this, which has hit Equinix’s share price and set up a nice entry point for income investors with an eye for value:

Equinix Goes on Sale

The current yield isn’t that exciting, at 1.6%, but the REIT more than makes up for it with dividend growth: its payout is up 55% in the last five years, and that’s helped drive an 80% gain in the share price:

Equinix’s Share Price Rises With Its Dividend

Meantime, Equinix’s payout is well-supported: the REIT is forecasting adjusted funds from operations (AFFO) of $28.93 to $29.26 for the full year, up 8% to 9% from 2021. The dividend accounts for just 42% of the midpoint of that range, so there’s plenty of room for more hikes.

Life Storage (LSI): Built for Booms and Busts

Buffalo-based Life is the opposite of Equinix in a lot of ways: instead of sophisticated data centers, Life runs one of the simplest businesses there is. It owns (wholly and through joint ventures) or manages 1,076 self-storage facilities across the country.

The self-storage industry’s low barriers to entry can weigh on profits, so LSI is an investment we need to keep an eye on. But right now that risk is being more than offset by the pandemic shopping boom—and consumers’ need to store their stuff. According to research firm ResearchandMarkets, self-storage is poised to grow 5.5% a year between 2021 and 2026, when it will be a $64-billion business.

Life is also executing smartly, expanding its footprint while raising rents: it ended the fourth quarter with a 93.9% occupancy rate and saw revenue per square foot jump 15.2% from a year earlier. That helped increase AFFO by 31.8%.

Besides renting space, Life makes money by managing storage facilities for other owners. This gives Life a leg up in the acquisition game because it regularly buys buildings from these owners, and by managing them first, it gains intimate knowledge of them.

On the dividend front, the company makes returning cash to shareholders a high priority, with FFO posting a compounded annualized growth rate of 9.9% between 2010 and 2021, just slightly outpacing the dividend’s 9.7% CAGR. With FFO on the march, we can expect this lucrative “cash flow handoff” to continue.

The All-in-One Option: A REIT CEF Yielding 8.4%

Finally, let’s look at a closed-end fund (CEF) called the CBRE Global Real Estate Income Fund (IGR), which gives us an instant REIT portfolio with two advantages:

  • Bigger dividends: IGR yields an outsized 8.4% today, and that dividend is paid monthly, not quarterly, as is the case with most REITs (or most other stocks, for that matter).
  • A discount: Because IGR is a CEF, it trades at a different price than its portfolio value—this is called the discount to NAV, and right now, IGR sports a 6.7% discount, so we’re essentially buying in for 93 cents on the dollar.

Finally, IGR holds some of the REITs we’re most interested in, like cell-tower REIT Crown Castle (CCI)—which, like Equinix, is a tech stock in disguise—warehouse landlord Prologis (PLD) and self-storage firms ExtraSpace Storage (EXD) and CubeSmart (CUBE).

— Brett Owens

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Source: Contrarian Outlook