Mo' Money, Mo' Money, Mo' Money
More money seems to be the universal answer to our problems. How do you reduce the risk in your savings? Save more money. How do weather a downturn? Save more money. How do you account for taxes? Save more money. At this rate, it will take forever to achieve financial independence...unless we can figure out how to make more money. So, we need to find companies that are not too small, pay a high dividend, and have stable financials. One measure of stability is the payout ratio. The payout ratio is the amount of the dividend divided by the net profit of the company. If the payout ratio is near or greater than 100%, the company has no room to increase its dividend and might even have to decrease its dividend. Thus, a company that has a payout ratio below their industry average is much more likely to have a stable or increasing dividend.
If we use a stock screener to find stocks that are mid-size or larger, pay a dividend of 6% or more, have increased their dividend over the last 5 years, and had a payout ratio below their industry average, we end up with a list of 24 stocks (as of 1/29/2019). Not all stock screeners are created the same. I used the one for ETrade account holders. If you use a different one, you might not have those same screening choices. Please keep in mind that everything from here on out is just my opinion. No one can predict the future.
The stocks from the screen are made up of tobacco companies, energy limited partnerships, real estate investment trusts, banks, one Argentinian telecom company, and one media publishing company. Of these, I feel the following are risky businesses: tobacco (it causes cancer), energy limited partnerships (they are subject to global warming), banking (too dependent upon interest rates), publishing (people only seem to read online now), and any company based in Argentina. This leaves us with real estate investment trusts.
Real Estate Investment Trusts (REITs) are basically landlords. They own some sort of real property and make their money by charging rent. The dividends of REITs are called distributions and they are treated as non-qualified dividends which means that they are taxed at regular income tax rates and not the long-term capital gain rate. If REIT distributions are your only income source, this is a good thing as long as your income is less than about $165,000 per year. In addition, the new 2018 Tax Cut and Jobs Act gives a 20% deduction to REIT income before taxes are applied (as long as you are not an employee of that REIT). Who could have guessed that a President whose wealth comes from real estate development would pass such a generous tax cut for real estate investors?
What makes one REIT different from another REIT is the kind of property they own. The property types owned by the REITs on this list are: malls, residential mortgages, skilled nursing facilities, and even private prisons. Of these, malls would seem the most sensitive to a recession. Residential mortgages used to be considered recession proof, but this was not the case during the housing crisis of 2008. Some believe that is unlikely to happen again, but you never know. Skilled nursing facilities is a fancy name for retirement homes. This definitely seems recession proof. The main danger here is Medicare reform (basically cuts). Most of the people in skilled nursing facilities have at least part of their fees paid for by Medicare or its State equivalent, and any reductions in those programs may affect the REIT’s ability to collect rent. Prisons would seem to be the most recession proof. If anything, during a recession, crime would go up and prison demand would increase. The danger here is that State elections may result in State legislatures that would vote to stop outsourcing prison administration to private prisons. The vast majority of private prisoners result from convictions for State crimes. In addition, at the end of the Obama administration, the Justice Department announced they would stop using private prisons for Federal prisoners. However, this was quickly reversed shortly after Donald Trump was sworn in.