Rachel’s note: There’s an indicator that has accurately predicted every recession in the past 50 years.
And last week, it began to flash… signaling that a recession is on the way.
Yet, one investment strategy is still showing signs of strength… even as the rest of the economy takes a hit.
Luckily, income investing expert and Casey Research friend Brad Thomas knows all about this tactic. And he’s put together a list of companies that will continue to provide growing dividends throughout tough times. Check it out here.
Then, read on for more details about how to prepare for this coming downturn…
By Brad Thomas, editor, Intelligent Income Daily
The warning signs are flashing: A recession is likely on the way.
Last week, an important economic indicator – the 10-year vs. three-month Treasury yield spread – flipped negative.
I’ll explain more about it in a minute. But as you can see in the chart above, shortly after the blue line fell below the orange line in previous years, the U.S. economy went into a recession.
And just last week, the blue line dipped below the orange once again.
Now, while we can’t be sure of the exact timing of when a recession begins… we want to make sure we’re prepared in case history repeats itself.
That’s why my team and I seek to find the best income-producing opportunities that can reward us, even if the rest of the economy takes a hit. These include companies that continue to provide growing dividends throughout tough times.
Today, I’ll tell you what makes some of my favorite companies strong in the face of recessions, share some examples, and explain how you can get a list of my favorite investments today.
What Is the 10-Year vs. Three-Month Spread?
The 10-year vs. three-month spread measures the difference between interest rates on long-term (10 year) and short-term (three month) government debt. It’s also called the “Yield Curve.”
Normally, the spread – or difference between the two – is positive. Meaning the yield on the 10-year Treasury is higher than the yield on the three-month Treasury. That makes sense, as investors demand a higher rate of return for taking risk over a longer period.
But when short-term interest rates are higher than long-term rates, the spread becomes negative. This means investors are less confident in our economic prospects over the long term…
And as it’s done in the past, it signals the high probability of a recession in the coming year. In fact, the 10-year/three-month spread going negative has accurately predicted every recession in the past 50 years.
And this time around, it’s important to understand the economy is weakening due to the Fed’s attempt to control inflation by hiking interest rates.
When you add in all these factors, more and more people are worried about the inevitability and devastating effects of a recession.
But you don’t have to be. Because one of our favorite investments is still showing signs of strength today.
This Investment Grows Even Through Recessions
Many of our favorite income investments are real estate investment trusts (REITs), which own and collect rent on real estate properties. And they’re well-prepared to survive the next downturn.
The National Association of REITs (Nareit) recently released its quarterly analysis of the sector. And the statistics show REITs are extremely healthy.
Average occupancy, which measures the percentage of properties leased to a tenant, sits near an all-time high of 94%.
Average interest expenses as a percentage of net operating income are at an all-time low of 17%. This means that REITs are easily able to cover their debt liabilities.
Average debt maturity is at a high of over seven years, which means that REITs don’t have to worry about refinancing debt at higher interest rates for many years.
Average REIT dividend payout ratios are near all-time lows at 65%. That shows REITs have plenty of room to increase payouts and a buffer to protect their dividends if the economy slows down.
But not all REITs are equal… Most specialize in a particular type of property, and growth between various REIT subsectors is different.
Office REITs, for example, are still struggling as work from home reduces demand for their properties. And hotel REITs still haven’t fully recovered from pandemic travel restrictions.
Others are continuing to see solid growth.
Another report from Nareit shows the fastest-growing REIT subsectors since 2018 are industrial (14%), residential (15%), retail (27%), and storage (23%). Here are some examples of quality REITs specializing in these high-demand sectors:
Industrial: First Industrial Realty Trust (FR) and Rexford Industrial (REXR)
Residential: AvalonBay Communities (AVB) and Essex Property Trust (ESS)
Retail: Federal Realty (FRT) and Realty Income (O)
Storage: Public Storage (PSA) and Life Storage (LSI)
The combination of strong demand for these types of properties and the solid financial positions of these REITs means they’re likely to continue rewarding investors with dividends… even through the next potential recession.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. The names I mentioned above are just a few examples of REITs within those specific sectors. If you’re interested in more detailed research and which REITs and other stocks are my favorite dividend-opportunities in today’s market, go here.
I just put together a briefing on the incredible power of REITs to help you tap into some of the fastest-growing markets in the country. Although you couldn’t access them normally, there’s a surprising way REITs can give you exposure to these plays. I’ll show you how.