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The Brexit vote sent shock waves through the global financial system. The Dow Jones Industrial Average lost 1,000 points in the first two market trading days after Britain voted 51.8%-42.8% to leave the European Union. The reason for the sell-off is the great uncertainty posed by the Brexit.
Although many stocks were falling on the Brexit news, there were still some U.S. stocks registering gains through the massive sell-off. In a global flight-to-safety trade, defensive stocks like utilities and real estate investment trusts are in favor.
Investors looking for shelter from the storms should consider Realty Income (NYSE: O), Duke Energy (NYSE: DUK), and Consolidated Edison (NYSE: ED).
Brexit Stocks: Utilities are Safe Havens
When geopolitical risk rears its ugly head, investors flock to safe havens. The stocks that become more popular tend to be stable dividend payers. The utility sector is one of the biggest sources of reliable dividend stocks. Duke Energy and Consolidated Edison are two in particular with long histories of generating reliable earnings, modest growth, and paying hefty dividends to shareholders.
Last year, Duke earned $4.54 per share in profit, after adjusting for one-time items. It is highly profitable, and this year, should grow earnings according to management’s forecast.
Duke’s earnings more than cover its $3.30 per share dividend. The stock offers a hefty 4% current dividend yield, which is almost double the yield of the S&P 500 Index.
Duke has paid uninterrupted dividends for 90 years and increases the dividend regularly. Last year the company bumped up its payout by 3%, and the dividend should be sustainable because Duke is only distributing less than three-quarters of its annual profit.
ConEd is another highly profitable utility that pays a rock-solid dividend. Last year, ConEd’s earnings rose 9% to $4.07 per share, thanks to rate increases. Earlier this year, ConEd raised its payout by 3%. The stock currently offers investors a 3.7% yield.
ConEd keeps a clear dividend policy. The company has set an optimal payout ratio of 60%-70% of its adjusted EPS. ConEd’s current payout ratio is around two-thirds of its annual profit, so it is right on target. ConEd is a Dividend Aristocrat, a select group of S&P 500 firms that have hiked dividends for at least 25 years in a row. ConEd has now come through with 42 consecutive annual dividend increases.
Investors can comfortably buy these stocks, even after the Brexit vote, because it has little to do with the performance of U.S. utilities. Put simply, people in the U.S. need to keep the lights on, Brexit or no Brexit. Utilities are not exposed to geopolitical events. Even when the U.S. economy went into recession in 2008, Duke Energy and ConEd continued to pay and increase their dividends.
A REIT to Rely On
In addition to utilities, real estate investment trusts, or REITs, are also great picks for defensive dividend payers. One of the best REITs is Realty Income. Realty Income is engaged in “net” leases, meaning the tenant is responsible not just for paying rent, but also for covering taxes, maintenance, and insurance.
Realty Income has a high-quality portfolio, concentrated in retail. It has more than 4,600 properties in its portfolio, spread across more than 240 commercial tenants in 47 different industries.
Last year, Realty Income grew revenue and funds from operation, a non-GAAP measure of cash flow, by 9% and 7%, respectively. Its portfolio had 97% occupancy last quarter.
Its solid business model results in steady dividends. Realty Income is commonly referred to as “The Monthly Dividend Company” because it pays dividends every month. Its 3.8% dividend yield is well ahead of the S&P 500 average yield. And, Realty Income is a strong dividend growth stock. It has paid uninterrupted dividends for more than 550 months in a row, and has raised its dividend 86 times since its IPO.
Final Thoughts
The markets are going haywire again, now that Britain has officially voted to leave the EU. For investors with a higher level of risk aversion, it may be a good time to get more defensive. High-yield utilities and REITs like Duke Energy, ConEd, and Realty Income, are a great way to do that.