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When building out a stock portfolio, it can help to start out by focusing on companies that dominate their respective industries. You can make that search a bit easier by focusing on industries where there are high barriers to entry, as the companies operating there tend to become premium providers that can help an investor maintain their portfolio’s margins.
Today we are going to look at four companies that dominate their industries (and also happen to pay reasonable dividends). Most (but not all) of them are real estate investment trusts (REITs) which usually deliver decent yields as well.
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Alexandria Real Estate Equities (ARE 0.91%) focuses on office properties that primarily cater to tech and life sciences companies. Since the start of the pandemic in 2020, office REITs have been put under some pressure since the work-from-home trend reduced the long-term demand for office space. As the trend continues, there is some valid concern when it comes your typical office REIT. But life sciences companies — which often require sophisticated laboratory space — aren’t typical, nor are they necessarily great remote work candidates.
Alexandria is a leading office REIT that specializes in life sciences properties, a niche that also requires a deep knowledge of FDA and health regulations. Not every office REIT has the experience and expertise required to build such properties, which creates a nice barrier to entry. At today’s share prices (which are down about 29% year to date), Alexandria’s dividend yields 2.9%.
American Tower (AMT 1.34%) builds cellphone towers and then leases out space on them to mobile phone companies, cable providers, and governments. Cell phone REIT growth has been driven by increased consumption of mobile data, which an Ericsson Mobility study forecasts will increase by a factor of 4.2 over the next six years. This growth is going to be driven at least partially by the wider adoption of 5G networks.
The barriers to entry in the cellphone tower business are huge as towers have already been constructed in many of the best locations. Finally, American Tower has an enviable record of dividend hikes, increasing its dividend every single quarter since 2012. The stock at current prices yields 2.1%. The stock price is down about 10.5% year to date, topping the S&P 500 drop of 14.7% over the same timeframe.
CME Group (CME -0.55%) is the parent company of the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, and several other exchanges. It operates the biggest derivatives exchange in the United States.
Its share price had been depressed during the first couple of years of the pandemic because benchmark interest rates were stuck at zero, which put a damper on trading in interest rate derivatives. But with the Federal Reserve raising the federal funds rate, average daily volumes in interest rates products have been rebounding — they’re up 24% over the past year. Volumes for equity index products (such as S&P 500 futures) have risen even more.
CME has a dominant position in its chosen markets, and it would be difficult for any competitor to dent its business model. At current share price levels, CME Group has a dividend yield of 1.94%.
Realty Income (O 1.21%) is a REIT that specializes in single-tenant real estate under long-term, triple-net leases. These leases require the tenant to handle most property expenses and typically last 10 years or more.
These leases are big financial commitments, and therefore proper vetting of tenants is crucial. About half of Realty Income’s tenants carry investment grade credit ratings. Realty Income’s enviable track record of dividend increases has earned it a spot on the list of Dividend Aristocrats.
During the pandemic, Realty Income performed better than most REITs and kept hiking its dividend throughout the crisis (it currently yields 4.4%). It should be a core holding for income investors.
Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alexandria Real Estate Equities and American Tower. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
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