These Dividend Stocks Provide Recession-Proof Income
The economy has slowed lately, but you probably already knew that.
Why it has slowed is important. And while you can point to many reasons, a big one is fear that the outbreak of the coronavirus will grind business to a halt.
And there’s good reason to think it could. Business across the United States has slowed due to a trade war with China, declining factory output, and lower consumer spending. With the pace of growth slowing, it wouldn’t take much to knock the economy into a recession.
So if the economy does putter out, what should you do with your money? You could do worse than bet on recession-proof dividend stocks. That way your distributions should carry you along with respectable returns even if equities trade sideways for a while.
The good news is that the recent market slide has turned some of these income stocks into cash cows. I’ve highlighted three of my favorite recession-proof dividend stocks below.
Iron Mountain Inc
If you’re like me, you probably have boxes upon boxes of old documents stashed somewhere. Now imagine the records generated by a business like a law firm or dental practice. For all of the talk about the “paperless office,” we still keep plenty of physical documents on hand for legal and practical reasons.
That has created a booming business for Iron Mountain Inc (NYSE:IRM). The company owns more than 1,450 facilities dedicated to holding, storing, and retrieving those paper records (and other valuable items). Its client base comprises about 230,000 customers, including 95% of the Fortune 1,000 companies. (Source: “Investor Relations,” Iron Mountain Inc, last accessed February 21, 2020.)
And these deals can be quite lucrative. Clients sign multi-year leases, which provides good cash flow visibility. Analysts describe these contracts as “sticky,” given the cost and hassle of relocating records. As a result, Iron Mountain’s customers tend to renew their contracts year after year.
This has created quite the income stream for IRM shareholders. Since Iron Mountain Inc mailed out its first dividend checks in 2010, management has boosted the payout almost tenfold. Today, the company pays a quarterly distribution of almost $0.62 per share, which comes out to an annual yield of 7.2%.
Magellan Midstream Partners, L.P.
Most people don’t think about the energy patch when searching for recession-proof dividend stocks. Magellan Midstream Partners, L.P. (NYSE:MMP), however, is an exception.
The reason comes down to Magellan’s business model. The partnership doesn’t actually drill for oil and gas; instead, it makes money by moving energy products across the continent. Magellan owns more than 11,000 miles of pipelines, which ship thousands of barrels of gasoline, crude oil, and other energy products each day. (Source: “Who is Magellan Midstream Partners?” Magellan Midstream Partners, L.P., last accessed February 21, 2020.)
These assets generate bond-like cash flows. Rather than betting on commodity prices, Magellan simply charges a fee on each barrel that flows through its network. So while energy prices swing from year to year, the volume of product passing through its facilities stays relatively consistent. For this reason, I often describe pipelines as the “toll roads” of the oil patch.
This funds a reliable dividend. Management has paid a distribution to unitholders every year since 2011. Even during the 2008/2009 financial crisis, when most companies slashed their payouts, Midstream Partners, L.P. increased its cash outlays to investors.
As of this writing, MMP shares pay a yield of 6.8%
Atmos Energy Corporation
It’s a pretty simple story with Atmos Energy Corporation (NYSE:ATO): it’s a well-run natural gas distributor serving more than three million customers. They heat their homes. You get a two percent dividend. A dividend, by the way, that has rolled in like clockwork for 32 years. (Source: “Company Profile,” Atmos Energy Corporation, last accessed February 21, 2020.)
But here’s what sets Atmos apart the competition. The company earns most of its income in Texas, which ranks as one of the most business-friendly states in the union. Commissioners there allow utilities to earn higher returns on their asset base than in other states.
For regular service, Atmos Energy has the freedom to charge high prices to households. The company can also charge large deposits and late fees. In effect, this allows the company to earn returns on investment above and beyond what utilities make elsewhere.
This has resulted in outsized returns for ATO shareholders. Since 1999, Atmos Energy Corporation has posted a total return, including dividends, of 821%. By comparison, the exchange-traded fund Utilities SPDR (NYSEARCA:XLU), which serves as a good barometer for the wider utilities industry, posted a gain of only 276% over the same period.
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