Many of our users at Stock Card love investing in the companies shaping the future of humanity. Artificial intelligence, 5G technologies, and gene-editing are some of the most researched themes and collections on our platform. We support our users in their quest to invest in the future by maintaining a comprehensive database of growth potential across thousands of industries and markets. Such databases power the first box on Stock Cards' 2X2s, and our Head of LiveOps, Shama Patwardhan, is the steward of this database. When the COVID-19 pandemic hit the world, Shama took on the challenge of digesting the pandemic's impact on its potential. In this blog post, she discusses the result of her learnings and the adjustments we are applying to Stock Card's growth potential database.
What happened in the first quarter of 2020?
Currently, the world is going through a rare phenomenon. One contagious virus brought the whole world to a standstill. COVID-19 virus, also called Coronavirus, was first detected in November 2019 in China and spread globally. The first case of Coronavirus in the U.S. was found in January 2020. By mid-March, all the global economies came to a screeching halt. The properties of the virus made it more difficult to contain or monitor. The majority of businesses, manufacturing facilities, global travel, and retail operations shut down. Consecutively, panic ensued as the uncertainty about jobs and daily normalcy created growing anxiety. Governments around the world announced a "shelter-in-place" policy, and cities around the world resemble apocalyptic scenes of empty streets. There was no hum to the engine of the world's economy.
How did the world's growth get impacted?
The impact of the Coronavirus outbreak was felt differently by different industries and businesses. Some markets, such as airlines and cruises, were struck severely that the companies' survival in those sectors was and is still doubtful. On the other hand, some markets, like pharmaceuticals and digital communications, experienced a surge in demand, well-above the most optimistic forecasts before the COVID-19 pandemic. Such extreme and unexpected negative and positive impacts created the need to review the growth rates and potential of the markets, sectors, and industries that power Stock Cards, and modify them such that they represent a more informed state of forecasted growth.
Hardest hit industries: The decline in demand has severely burnt several industries. Due to the "shelter-in-place" rule, people stepped out of their houses only for essential shopping needs. This change in consumer behavior affected has hit some of the industries the most:
Highest positive impact: While some industries struggled to survive, some could barely satisfy the explosive demands for their products. Among several sectors and industries, some are benefited from an extraordinary surge in demand. Here are a few examples:
Adjustments to Stock Card's growth potential database
Stock Card's growth potential database typically includes three to five years of forecasted growth potential figures for each sector, industry, and market. However, due to the varied near-term impact of the Coronavirus outbreak, we added a new one-year projection to the database for 2020, to incorporate the effect of the impact. We applied short-term adjustment by first short-listing all the sectors, industries, and core markets negatively or positively affected by the outbreak. We then applied the appropriate adjustment factor to each one.
COVID-19 Impact Adjustment Factor
We started the process by quantifying the impact of a partial shutdown across sectors and industries. Researchers at George Mason University studied how the level of digitalization can be used to calculate and quantify the impact of COVID-19 on industries and sectors. The higher the digitalization, the lower the impact. Using the results of this research, a penalty of 2.78% for high-digitalization industries and a penalty of 5.56% for low-digitalization industries can quantify the impact of COVID-19 on sectors, industries, and markets.
Additionally, to incorporate the impact of social distancing on profoundly impacted industries, we took an additional adjustment. We reduced the resultant CAGR from the previous step by industry-specific projected decline percentage. We short-listed the markets that are profoundly impacted by social distancing such as airlines and restaurants and applied an additional adjustment factor to account for the impact. As of May 29th, 2020, we have calculated the rate based on a 3-month partial shutdown assumption.
The above two-step process resulted in a new short-term growth rate database to power Stock Card's growth potential bucket on our iconic 2X2s. Throughout 2020, we will monitor the state and the progress of the reopening of the economy. We would be revising this COVID-19 growth potential figures based on how many months the partial shutdown continues. We assumed that the new growth rates are applicable for at least one year until the economies resume their previous performance level.
The new 2020 growth potential database
The final result is a new 2020 growth potential database that we are pushing live on June 1st, 2020. The outbreak negatively impacted approximately 50 industries, and another 30 reported an unusual surge in demand. You would see the results by visiting any Stock Card page and clicking on the first bucket of any of the 2X2s. The video below shows how you can get to the revised growth of potential data on Stock Cards.
Industries and Markets affected by COVID-19
The COVID-19 pandemic has taken a toll on many sectors across the globe. The real estate sector is one of the hard-hit areas of the economy. As restaurants, bars, retail stores, and offices shut down around the world, landlords, property owners, and property management companies are going through an extended period of declining revenues. It is no surprise that the S&P 500 Global REIT index has fallen more than 30% since the middle of February 2020. In regular times, REITs (Real Estate Income Trusts) are some of the most popular types of securities investors hold for their abundant and reliable dividend income. However, the COVID-19 pandemic has caused many REITs' investors to question the reliability of investing in REITs. In this blog post, we share a list of reliable REITs worthy of attention despite the COVID-19 impact.
Aren't all REITs reliable?
When we published the COVID-19 investment resources, we discussed not every company can survive the COVID-19 pandemic. Those with ample cash and access to capital and manageable debt have the highest likelihood of going through the COVID-19 economic crisis and coming out of it ready to take off. The same logic applies to REITs. Not all REITs are worth your investment dollars. Some REITs have the operational strengths that can survive through the economy's cycles and keep rewarding the investors with a reliable source of income.
How to find Reliable REITs?
There are 335 REITs listed on the main U.S. stock exchanges. In the first step, we wanted to get rid of those with massive liabilities and debt. REITs with high-interest expenses compared to their earnings (EBIT) are the worrisome bunch. Companies with debt have to be able to cover the interest expense of their debt using their earnings. Just by using that as criteria, nearly two-thirds of REITs are out of the list. To make the search for reliable REITs even more precise, we applied a few additional filters:
Those criteria are pretty standard for evaluating companies with strong balance sheets. However, there is one data point that is particularly important for assessing REITs. For a non-REIT dividend-paying stock, typically, investors look at the stock's payout ratio. This ratio refers to the percentage of the company's earnings that is used to fund dividends. When such a rate goes above 70% to 80%, it is seen as a red flag. All companies need to reinvest a portion of their earnings to grow, and it's not an operationally savvy idea to borrow money to pay dividends. Therefore, the dividend payout ratio is an indicator of the sustainability of the dividend payment in the future. If a company uses almost all of its earnings to pay dividends, or worst, if it uses funds beyond its profits to fund its dividend payments, the sustainability of the dividend payment is questionable. The same logic applies to REITs. However, the usual payout ratio is not the right way of measuring the sustainability of a REIT's dividend.
Best Brokerage for Dividend Investors
REITs are one of the best dividend-paying investments. Especially if you choose to reinvest your dividend income back into your portfolio, gradually and steadily, you own more of the companies you have initially added to your portfolio. All you need to do is to sign up for a brokerage account that allows you to easily opt-in a dividend reinvestment option (a.k.a. DRIP). We like M1 Finance, particularly, for its easy ways of managing your account, including opting in a DRIP offer.
What is a FFO payout ratio?
Being in the business real estate, a REIT has a high depreciation cost. This cost is purely an accounting-driven number, and it is not an actual cash expense. Companies use depreciation to "expense" the initial capital they invest in acquiring the real estate over a few years. This accounting practice allows investment in real estate to be worthwhile by reducing the nominal earnings of the property or landowner and giving the owner significant savings in the amount of income tax that is calculated using the company's earnings. Because of this accounting practice, the earnings of a REIT are artificially (of course, legally) underestimated. Consequently, you cannot blame a REIT for having a high payout ratio and use it as a reason to skip investing in it. Instead, REIT investors look at FFO per share (Funds from Operations per share) and use that as a replacement for the earnings per share to calculate the company's payout ratio. Accordingly, we used the FFO payout ratio in our search for reliable REITs.
That adjustment in our screening process resulted in an additional 20 or so REITs that are reliable but would have been rejected if we used the standard calculations of the payout ratio.
Once we applied all the above-mentioned filters, the final results were a list of 32 REITs most likely reliable enough to go through the COVID-19 pandemic or any other economic crisis and come out of it without the need to cut their dividends.
The list is available to all Stock Card users on the Discover page using the "Reliable REITs" tag. You can access it by creating a free account on Stock Card.
Some times, companies with strong operations and enough cash at hand share their success with their shareholders in the form of a dividend. Many investors use dividend payout as a source of side income or reinvest the money to grow their investments. But not every dividend-payer is worth investing in. In the latest addition to Stock Card's collections, we looked for true dividend-payer stocks that are worthy of every dividend seeker's attention.
Launching Stock Card's "Stocks For Dividend-Seekers" collection
We started the process by looking for stable dividend-paying companies using market capitalization, beta, and dividend yield:
Not every dividend-paying stock is worth your attention!
Finding reliable dividend-paying stocks is not just about searching for companies that pay a dividend. You also need to weed out those companies that cannot sustain their dividend payout and focus on those that have a reliable history of growing their dividend yield. We added a comprehensive list of criteria to our research to find the true dividend-paying stocks, including a few critical ones:
The result of the above analysis was a new set of 91 true dividend-paying stocks. We added them to Stock Card's collections, and you can access them for free by typing "Stocks for Dividend Seekers" in the search box on our website. Log in and check the list: