Studies show that dividend stocks have historically trumped the average returns of the stock market, as investors collect juicy cash payments in addition to capital appreciation from rising stock prices over time.
Below, three Fools lay out the case for investing in Caretrust REIT (CTRE 1.31%), Eaton Vance Limited Duration Income Fund (EVV 0.90%), and Ford Motor Company (F 0.47%), each of which pays more than twice the yield of the S&P 500 index.
If you know about this trend, you'll know why this stock is worth owning
Jason Hall (Caretrust REIT): One of the biggest demographic trends that's already beginning to affect the U.S. is the aging of the baby boomer generation. The oldest boomers have started reaching retirement age, while the youngest won't turn 65 until 2029. In the meantime, about 3.5 million of them will reach retirement age every year.
This major trend will double the number of Americans aged 65 and over within a couple of decades, creating a huge need for more healthcare, skilled nursing, and assisted living facilities to support the growing aging population. After all, the U.S. Department of Health and Human Services estimates that 70% of Americans who reach age 65 will need some long-term care, and over one-third will spend at least one year in a skilled nursing facility.
And it's exactly senior housing facilities that Caretrust owns, contracting with top healthcare providers, which lease Caretrust's properties under long-term contracts. With fewer than 170 properties at last report, Caretrust has a significant growth opportunity in the years ahead. And this expansion should drive steady, and potentially very big, dividend growth for investors willing to hold the REIT for years and years.
At recent prices, Caretrust stock yields over 4%, and it increased the payout 9% earlier this year. Trading for about 16 times funds from operations -- a better earnings valuation metric for a REIT -- it's reasonably priced today. If you're looking to profit from a huge trend that's going to play out for decades, Caretrust is an excellent dividend stock to buy now.
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A better bond fund that yields nearly 7%
Jordan Wathen (Eaton Vance Limited Duration Income Fund): Closed-end funds (CEFs) can offer rare opportunities to buy well-managed funds for less than their assets are worth. The high-yielding Eaton Vance Limited Duration Income Fund trades at a 7% discount to its net asset value, and yields 6.9% based on its current monthly dividends.
The Eaton Vance Limited Duration Income Fund uses a barbell strategy: Its investments in high-quality bonds (AAA bonds make up approximately 24% of the portfolio) are balanced by more speculative debt securities, rated BB and B, which make up 26% and 30% of the portfolio, respectively.
Importantly, the fund is structured to benefit from rising rates, due to its mandate to invest in low-duration fixed-income assets, including short-term bonds and floating-rate loans. After an uptick in rates on the short-term end of the yield curve, each additional increase in rates by the Federal Reserve should help drive income higher, as its floating-rate loans pay interest based on a short-term interest rate benchmark.
Eaton Vance Limited Duration Income Fund has impressive performance over a full market cycle, generating a return in excess of 7% annualized over the most recent 10-year period, which includes the 2008 financial crisis, which was devastating to many high-yielding strategies. Wide diversification helps, as the fund has nearly 1,400 holdings in the portfolio.
Investors could easily earn returns in excess of 9% per year over the next three years thanks to a combination of beefy monthly dividends and capital appreciation, if Eaton Vance Limited Duration Income Fund shares trade back to book value. It would be a very good return from a bond fund.
Down but not out
Daniel Miller (Ford Motor Company): You won't have to talk to many investors before you find one bearish on Ford Motor Company. That's understandable considering Ford faces near-term challenges, such as Brexit and a slowing North American market, and high long-term costs to invest in autonomous-vehicle technology and smart-mobility projects to compete with companies such as Uber and Lyft. But investors in the know realize that much of the negativity is priced in and that Ford's dividend is an attractive option for income generation.
Ford's regular quarterly dividend stands at $0.15, a total of $0.60 annually, which is good for a robust dividend yield of 5.4% by itself. But what some casual investors might not know is that Ford's dividend is even better than that. During the first quarter of 2016, Ford paid investors a supplemental cash dividend worth $0.25 per share. This year the supplemental dividend was lower, at $0.05 per share, but still a welcome addition. The supplemental dividend is a once-a-year bonus, and the value will move in coordination with the company's profitability to ensure a more sustainable dividend through the cyclical nature of the automotive business.
Ford is currently in a transition as Jim Hackett is taking over the reins from former CEO Mark Fields. The new CEO, who is well-regarded in the tech world, plans to reduce the bureaucracy of Ford's processes and change the overall strategy for its products to make the company more responsive to changing consumer demand. Ford also needs to evolve and expand its products to enter the new world of smart-mobility projects. These are no simple tasks and, with auto sales peaking in the U.S., it's understandable why Ford trades at a paltry 11 times its trailing-12-month earnings. But for investors in the know, Ford's dividend provides a juicy yield that is even better than people realize, because of the supplemental dividend.
