After more than a decade of growth stocks outperforming value- and income-oriented stocks, fortunes were drastically reversed in 2022. In fact, the Nasdaq Composite plunged 33% last year.
And because the Federal Reserve probably won't consider interest rate cuts until 2024, the stock market could still be a couple of years away from hitting a bottom. That's why it may be a good idea for investors to add quality income stocks to their portfolios to help them weather the market volatility that could lie ahead. Here are two stocks that could be smart picks to buy and hold well past this year.
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1. Iron Mountain: A fast-growing REIT
Iron Mountain (IRM -0.95%) is a real estate investment trust (REIT) that owns 1,380 properties in 59 countries. The company provides document storage, document destruction, data center, and cloud services to an estimated 225,000 businesses around the world.
The vast majority (64%) of Iron Mountain's $4.5 billion in 2021 revenue was generated from records storage. Because companies must retain many records for several years or indefinitely, this creates stable demand for records storage services. Along with high costs of switching from Iron Mountain's storage facilities to another facility, that explains the company's sky-high 98% customer retention rate.
But the REIT isn't getting complacent, either. Iron Mountain has known for years that records will eventually be stored digitally, which is why the company expanded into data centers and digital solutions several years ago. These decisions to adapt to the information age have boosted its total addressable market from $10 billion in 2015 to more than $130 billion as of now.
As Iron Mountain builds on its 1,300-plus strong data center customer base and more customers flock to its digital solutions, robust growth should continue. The company expects its adjusted funds from operations (AFFO) per share to grow about 8% to $3.76 in 2022.
Iron Mountain's 4.7% dividend yield is nearly triple the S&P 500 index's 1.7% yield. And with the dividend payout ratio approaching the low-to-mid-60% targeted range, the company may resume dividend growth as soon as this year.
The stock's cheap valuation seals the deal to make it a buy. The REIT is trading at a price-to-AFFO per share ratio of just 13.8, which is a bargain for its growth potential.
2. Main Street Capital: A blue chip business-development company
With more than $6 billion in capital under management ($4.5 billion managed internally and $1.5 billion managed on behalf of external organizations), Main Street Capital (MAIN 0.45%) is a leading business development company (BDC). BDCs provide less-established and smaller businesses with much-needed capital to expand in exchange for equity and/or debt stakes.
Main Street Capital mostly serves the lower-middle market (LMM). An estimated 195,000 businesses in the U.S. fit into this market. The LMM is defined as businesses with revenue ranging from $10 million to $150 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) between $3 million and $20 million.
With nearly 200 investments across dozens of industries, Main Street Capital is a diversified BDC. The company is especially benefiting from elevated interest rates. This is because while 73% of Main Street Capital's debt outstanding is at modest fixed interest rates, 76% of its debt investments bear interest at floating rates. This means that as interest rates continue to rise, so will the company's distributable net investment income (DNII).
Main Street Capital's dividend yield is a whopping 6.9%, not including special dividends. And with the dividend payout ratio coming in at just 91.7% (including special dividends), the dividend is quite safe. That's because the payout ratio is just above the 90% threshold that is required to maintain its status as a BDC.
Best of all, Main Street Capital's valuation is appealing. The stock's trailing-12-month price-to-DNII-per-share ratio is just 12.4, which is cheap for a BDC of Main Street Capital's quality.
