Investors who like the idea of having some extra cash regularly deposited in their accounts have a golden opportunity right now. While higher interest rates are making it more expensive for people to buy cars and homes, it’s also pushing dividend yields up in the stock market.
The S&P 500 average yield is still historically low at 1.32%, but income investors can do better. Here are two outstanding dividend stocks that are trading well off their highs but that pay higher yields.
1. Realty Income
Realty Income (NYSE: O) is the first quality dividend stock to consider in this environment. It operates as a real estate investment trust (REIT), which means it is required to distribute at least 90% of its taxable income (excluding capital gains) to shareholders. It does this through monthly dividends, where it has a 55-year record of paying dividends to investors.
Its long dividend record reflects the quality of its commercial property portfolio. It is extremely diversified across over 15,000 properties, where it has long-term net lease agreements with major retail companies like Walmart, Tractor Supply, and Dollar General. Because it prioritizes partnering with established industry leaders, Realty Income has been able to make consistent dividend payments for decades and likely will continue to do so for another half-century.
In fact, its clients typically pay rent increases that are tied to inflation, which gives Realty Income somewhat of a buffer as costs increase. Management targets retail clients that benefit from some kind of competitive advantage, such as discounted pricing. It also prioritizes maintaining a geographically diversified property portfolio outside the U.S.
From 1994 through March 31, 2024, the stock delivered a compound annual return (including dividends) of 13.6%. The company’s size may limit its future growth prospects, but it’s not short of opportunities to grow the business and the dividend. Management invested $598 million in the first quarter in properties that cover the retail, industrial, and data center markets.
The monthly dividend has increased for 29 consecutive years. The current payout is $0.2630 per share, but the stock is trading 29% off its previous peak, and that has pushed the forward dividend yield up to 5.49%. That yield would translate to $549 in annual income, or $45 per month, on a $10,000 investment. Of course, investors can also expect that payment to gradually grow over time.
2. Home Depot
Home Depot (NYSE: HD) benefits from massive scale with its more than 2,300 stores in the U.S., Puerto Rico, the U.S. Virgin Islands, Guam, Canada, and Mexico. That’s enough to make it the world’s largest home improvement retailer, and its store expansion over the last 40 years has made the stock a very rewarding investment. It has paid a growing dividend since 1987.
Home Depot shares currently trade down 13% from their previous high over weak sales trends. Higher interest rates are making it more expensive to finance home projects, which caused Home Depot to report a 2% year-over-over decline in total sales in the first quarter.
However, Home Depot still has a tremendous opportunity ahead. The home improvement market is valued at $1 trillion, but within that addressable market, Home Depot is focusing more on the $250 billion residential contractor segment. It just completed the $18.25 billion acquisition of residential distributor SRS Distribution, which serves professional contractors in landscaping, pool, and roofing. Home Depot will emerge from this downturn in a stronger competitive position.
With Home Depot’s current quarterly dividend at $2.25 per share, investors can get an attractive yield of 2.45% right now. Moreover, investors can expect Home Depot to continue growing its dividend, since it has increased the quarterly payment by 65% over the last five years and still only paid out 57% of its trailing earnings.
One thing to remember about Realty Income and Home Depot is that lower interest rates could be a catalyst to send their stocks higher. The rate of inflation has been trending down, and that could eventually cause the Federal Reserve to put the brakes on more rate hikes. In that scenario, dividend stocks with high yields would likely see more demand from income investors sending their share prices higher.
Should you invest $1,000 in Realty Income right now?
Before you buy stock in Realty Income, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $657,306!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot, Realty Income, and Walmart. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.
2 Top Dividend Stocks to Buy On the Dip was originally published by The Motley Fool
Source Agencies
