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2 Top High-Yield Dividend Stocks to Buy Now

By Matthew Frankel, CFP® – Oct 19, 2016 at 12:31PM

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These two stocks can provide growth and income for decades.

Image source: Getty Images.

Just because a stock pays a high dividend doesn't make it a great investment. High-yielding stocks are nice, but generous dividends combined with strong growth potential and an attractive share price are a long-term investor's dream. With that in mind, here are two great REITs you can buy right now that could be great additions to your dividend portfolio for decades to come.

A different way to invest in technology

Digital Realty Trust (DLR -0.45%) is a REIT that owns data center properties and leases the space to tenants such as Facebook, IBM, and AT&T, just to name a few. The company has a high occupancy level, a large and diverse portfolio of properties, and a strong balance sheet that allows it to pursue attractive growth opportunities, such as the recent TelX acquisition.

In a nutshell, I like Digital Realty because it is a leader in a market that has tremendous room to grow. According to Cisco, global IP traffic will increase at a 22% annualized rate through 2020, and there will be an additional 10 billion more connected devices than there are today, driving mobile data traffic up by 700%. Not only is the market growing, but Digital Realty has lots of room to expand geographically as well. Even after significant international expansion, three-fourths of the company's rental income still comes from the U.S.

Source: Digital Realty investor presentation.

Finally, Digital Realty's capitalization is just 25% debt, one of the lowest levels among REIT peers. The company has an investment-grade credit rating, and enough financial flexibility to grow as fast as management wants.

Although Digital Realty's 3.7% dividend yield isn't incredibly high, at least by REIT standards, it represents just 62% of the company's projected 2016 FFO, well below the payout ratio of most REITs. Additionally, consider that Digital Realty has increased its dividend at a 12% annualized rate over the past decade, and there's no reason to believe that trend won't continue.

One high-dividend REIT that's about to become two

Finally, healthcare REIT HCP, Inc. (PEAK 1.72%) is a special situation right now. The company decided earlier in 2016 to separate its skilled nursing/post-acute care properties into a newly created REIT known as Quality Care Properties, or QCP for short. And the spin-off date is right around the corner.

Here's a thorough discussion of the details of the spin-off, but the general idea is that HCP shareholders as of the close of business on Monday, Oct. 24, will be entitled to one share of QCP for every five HCP shares they own. This is one week away as I write this, and to be clear, I'm a long-term fan of HCP whether or not the spin-off has already been completed as you're reading this.

HCP's business model is simple: Acquire top-notch healthcare properties, and then partner with some of the best operators in the business to run them. The results so far have been impressive. HCP has increased its dividend for 27 consecutive years and pays an impressive 6.4% yield that is more than covered by the company's FFO and FAD (funds available for distribution).

In addition to the fact that I liked HCP already (I've owned the stock for some time now), I view the spin-off as an excellent development for shareholders. HCP will be left with a high-quality asset portfolio that will increase its stability and financial flexibility, and QCP will be free to pursue value-maximizing strategies that are specific to its core property types.

Source: HCP investor presentation.

Although it's unclear what the dividend policies of HCP and QCP will be post-spinoff, I'd be surprised if the combined dividends of the two companies didn't provide shareholders with a 28th consecutive dividend increase next year.

Invest with the long term in mind

As a final thought, I can only recommend these stocks to investors who have a long investment horizon -- say, five years or more. All of these can (and will) experience short-term volatility, and it can be rather unpredictable. For example, a rapid rise in interest rates could send shares of both REITs plunging.

The point is that these companies have rock-solid business models that, over time, should produce excellent returns for shareholders who buy now. As I tell my friends and family when they ask for stock recommendations, "It's entirely possible that you'll hate me in a month from now, but I'm highly confident you'll love me a decade from now." The same applies to these two stocks.

Matthew Frankel owns shares of AT&T, Digital Realty Trust, and HCP. The Motley Fool owns shares of and recommends Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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