The coronavirus pandemic put the ultimate stress test on income investments. Hundreds of companies cut or suspended dividend payments. Companies that did not cut dividends through the pandemic should be high on the list for income-focused investors—and companies that grew their dividends in 2020 deserve gold stars and a place in your portfolio.
In February and March of 2020, the spread of the pandemic resulted in both investors and companies facing tremendous uncertainty about what would happen to the economy. Soon, companies were announcing dividend cuts in droves. In hindsight, you can find two reasons for the dividend cuts.
Some industries did indeed suffer a negative impact from the pandemic. The hotel/lodging REITs are the best examples. Hotels were suddenly almost entirely empty, and as a result, revenues and free cash flow needed to pay dividends were not available. Eighteen months later, the hotel REITs are not earning enough to restart meaningful dividend payments.
Companies that cut dividends as a precautionary move account for another group of dividend cuts. These are the ones that, in hindsight, continued to generate enough free cash flow to support their pre-pandemic dividend rates. Many of the companies making this type of dividend cut were in the energy midstream sector. Most of these companies realized few, if any, adverse financial consequences from the pandemic shutdown. However, I have some heartburn with several companies in midstream: these are the ones that cut dividends, even as they continued to earn excellent cash flow, and still have not restarted dividend growth.
For income investors, the pandemic heroes were the companies that did not cut dividend rates. Stocks from this group now make up the core of my Dividend Hunter recommendations list. Even better, I give tremendous praise (and spots on my recommendations list) to companies that increased dividends in 2020. Here are two companies on that list, both from an industry (casino-owning REITs) in which you might have expected dividend cuts. Instead, they increased their dividend rates over the last year.
VICI Properties (VICI) owns 28 gaming properties, operated by name-brand gaming companies such as Caesars, The Venitian, Hard Rock, and Penn National. All properties are on triple-net leases with annual rent escalators. Through the pandemic, VICI collected 100% of the rent due from the companies leasing the casinos. Over the last year, VICI grew its dividend by 11%, and the shares currently yield 4.0%.
MGM Growth Properties (MGP) owns 12 gaming, hotel, and convention resorts operated by MGM Resorts International (MGM). The entire portfolio of properties is on a single triple-net master lease with MGM. The gaming company also pays all of the REIT’s operating expenses. Over the last year, the MGP dividend grew by 5.6%. The shares currently yield 5.6%.