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Recession Worries? Defensive Income Solutions with Up to 7% Yields


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Amidst recent developments around interest rates, the employment scene, and market valuations, many people naturally wonder what companies are best to own if a recession starts and we go through a tough bear market, and which companies are more likely to cut their dividends.


The simple answer is: It depends. Every recession is different. It depends on the type of recession and how it impacts the companies you invest in. Rather than focusing on worrying about if and how a recession can cause stock prices to fall, I prefer to focus on the fundamentals of the company and monitor how the business would be impacted by the recession. If the fundamentals are strong then no matter what people think about the price of the stock, the company will bounce back from a drop quicker and stronger. These fundamentals include a strong balance sheet, low debt levels, a history of consistent profitability, and a sustainable business model.


For example, companies with defensive qualities such as stable cash flows, resilient demand for their products or services, and market-leading positions are often better equipped to navigate economic challenges. Additionally, companies with reliable and consistent dividend payments over the long term are a great indication that it has handled previous recessions and still running strong. We will now look at two such companies that also happen to be very generous dividend payers.


Pick 1: EPD - Yield 7.3%


Enterprise Products Partners LP (EPD) is the largest American midstream company by market cap. It is one of the best-managed MLPs in the industry, with 25 consecutive years of distribution growth and $53.2 billion returned to unitholders via distributions & unit buybacks since 1998.


Note: EPD is a Master Limited Partnership that issues a Schedule K-1 to investors.


During the first quarter, EPD reported a Distributable Cash Flow of $1.9 billion (flat YoY), delivering a 1.7x coverage for its distribution. The partnership retained $786 million of this DCF. and repurchased ~$40 million of its common units on the open market, utilizing a total of 48% of its $2 billion unit buyback program. EPD also made capital investments of $1.1 billion, including $875 million for growth capital projects and $180 million for sustaining capital expenditures. The partnership has several projects coming into service in the next 12-18 months, providing excellent tailwinds for continued DCF and distribution growth. 


EPD maintains a strong A3-rated balance sheet and excellent liquidity of approximately $4.5 billion (including unrestricted cash and available borrowing capacity under its revolving credit facilities), positioning it well to acquire suitable targets as the opportunity arises.

EPD is not just another Dividend Aristocrat, it is la Crème de la crème, offering the highest yield, lowest leverage levels, and CFFO payout and ROE in the top quartiles.


With multi-year fee-based contracts with credit-worthy companies, high asset utilization, and excess free cash flow after distributions, we expect EPD to be a strong participant in the growing energy export business while being a meaningful contender in the M&A race to maintain and improve its competitive positioning.


Pick 2: O - Yield 5.9%


Realty Income Corporation (O) is "The Monthly Dividend Company". It is a property REIT (Real Estate Investment Trust) that invests in a diverse portfolio of properties using "triple-net" leases. Triple-net leases are a type of lease that makes the tenant responsible for paying most property-level costs.


O has over 15,000 properties in the United States and Europe. It has experienced high and stable occupancy rates through recessions and the global pandemic. As a result, O has seen consistent growth in AFFO/share, with 2009 being the only year since going public when the AFFO shrunk. The REIT has historically taken advantage of recessionary periods to go on an M&A spree, utilizing its strong balance sheet to acquire smaller peers that didn't fare well through the crisis.


O now has 125 dividend raises under its belt, with 107 consecutive quarters of raises. Some of those quarters had two raises, like the past three months. O has continued hiking its dividend rain or shine. When times are tough and other companies are cutting, there is O, raising its dividend frequently.


O is a great REIT to buy and hold "forever", and it is at the top of my list for REITs I would want to hold through a recession and buy amidst discounted prices.


Conclusion


The impact of a potential recession on companies and their dividends can vary widely. By focusing on strong fundamentals, understanding the specific vulnerabilities and strengths of the companies you're invested in, and adopting a long-term perspective in your investing approach, you can better position yourself to navigate potential economic challenges and benefit from your investments' growth potential over time.


I don’t believe in accumulating cash in fear of a bear market, because it is impossible to predict when one will begin or end. Such a pursuit causes investors to end up losing valuable dividend payments and potential gains from the inevitable market recovery. At High Dividend Opportunities, we emphasize our time in the market, as it means a healthy stream of dividend dollars accumulating in our accounts. By prudently reinvesting a portion (we recommend at least 25%), we remain well-positioned to capitalize on the recovery, collecting income all along. This is the beauty of the Income Method, designed to enable a stress-free retirement.


 

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