The best dividend stocks provide investors with a solid yield today and hold promise to meaningfully increase their payout over time. While finding stocks that offer both of these qualities is difficult, we Fools know there are a handful of great choices out there if you're willing to look hard enough.
So which dividend stocks do we think will perform for their shareholders over the next decade? We asked that question to a team of Fools, and they picked General Motors (NYSE:GM), Wynn Resorts (NASDAQ:WYNN), and Welltower (NYSE:HCN).
Forget Tesla: This is the future-tech automaker to bet on
John Rosevear (General Motors): Why would anyone buy an automaker right now -- aside from maybe Tesla -- given that the whole industry is on the verge of being disrupted by new technologies such as electric vehicles and self-driving systems?
Let me put it this way: What if I told you that some of the traditional automakers would not just survive but actually thrive in the new world of high-tech mobility?
And what if I told you that one of those big automakers -- maybe the best positioned of them all -- is sitting under many investors' radars right now, trading at just 5.5 times last year's earnings and paying a 4.2% dividend? (That dividend is sustainable, by the way.)
This isn't the General Motors of old. Under CEO Mary Barra, GM is a leader (yes, I said leader) in many of those disruptive new fields:
- GM was the first company to ship an affordable electric car with more than 200 miles of range, the Chevrolet Bolt EV.
- GM subsidiary Cruise Automation is widely considered to be near the forefront of self-driving research and development.
- GM owns 9% of ride-hailing company Lyft, and 100% of urban car-sharing company Maven.
- GM already has a vehicle designed for autonomous ride-hailing in production right now -- simply put, the Bolt was designed to become a self-driving taxi.
Barra and her team haven't neglected GM's traditional strengths, either. But they have reshaped GM's global footprint, discarding unprofitable operations and redirecting those investments to higher-profit opportunities. The results are easy to see: GM just posted another strong quarter, with an outstanding 10% operating margin on its continuing operations powered by good sales of its well-regarded SUVs and trucks in the U.S. and China.
Long story short: Tesla and other high-tech entrants get a lot of investor attention right now. But quietly, GM is keeping pace and then some -- while generating strong profits and paying a great dividend. Ten years out, today's prices could look like a steal.
A wager on Asia's gaming market
Travis Hoium (Wynn Resorts): Gambling stocks haven't been big dividend payers for long, but they're the perfect dividend stocks long-term because of the cash they generate. And Wynn Resorts is one of the dividend leaders, with a lot of growth potential ahead.
The dividends gambling companies pay are driven by the cash flow coming from casinos, and the best proxy to use to judge cash flow each quarter is EBITDA. Wynn's EBITDA has fluctuated a lot the past few years, falling from 2014 to 2016, as Macau's gambling revenue dropped -- but it's back on the rise:
The reason I think this is a dividend for the next decade is the base of cash flow and the growth projects Wynn is investing in. Wynn Palace was completed in the fall of 2016 and could generate $1 billion in EBITDA all by itself. Wynn Boston Harbor is currently under construction and will add more cash flow in the U.S., although estimating EBITDA would be speculation at this point. And Paradise Park behind Wynn Las Vegas will be a $500 million project that's likely to add $100 million or more to EBITDA at the resort.
Add it all up, and Wynn should have well over $2 billion in EBITDA, and potentially $3 billion, a decade from now. And with a $13.7 billion market cap, it will have the ability to pay a much higher dividend than the current $2 per share annually. For perspective, the company paid out $6 in dividends in 2014 before construction spending rose so much. That hints that the dividend should be meaningfully higher a decade from now.
Put demographic trends on your side
Brian Feroldi (Welltower): The U.S. Census Bureau projects that the number of citizens 65 and over is going to grow rapidly over the next few decades. In fact, between 2012 and 2050, the number of seniors is expected to rise from 43 million to more than 83 million. That's almost a clean double. If that projection proves accurate, then the demand for senior housing should continue to steadily rise over the next half-century. That's great news for shareholders of Welltower.
Welltower is a real estate investment trust (REIT) that specializes in healthcare properties. The company currently owns 1,384 healthcare facilities in the U.S., U.K., and Canada, which makes it the largest healthcare-focused REIT in the public markets. About 70% of its properties are classified as senior housing -- think memory care, assisted living, or independent living facilities -- while the remainder is divided up between medical outpatient facilities and post-acute care.
Welltower's business model is to raise capital, buy healthcare facilities, and lease them out to its operating partners. This model allows the company to pull in steady monthly rent checks that are generally passed along to investors in the form of a steadily rising dividend. In turn, the company's share price rises, which allows it to raise more capital and buy more properties, and the cycle continues.
Welltower has used this playbook to make 185 quarterly dividend payments in a row. That's a remarkable streak that has helped its stock to crush the S&P 500 over the long term.
Even today, Welltower's 4.8% dividend looks poised for long-term growth. The company expects 2017 funds from operations -- which is a REIT proxy for earnings -- to land between $4.15 and $4.25 per diluted share. Since its annual dividend payment is $3.48 per share, Welltower's payout ratio is 82%. That hints that the dividend is safe today and that management should be able to grow its payment over time as its empire expands.
Looking ahead, the gradual graying of the population should ensure that Welltower has plenty of opportunity to continue what it does best -- raise capital, buy properties, and pay a rising dividend. That makes me confident that this is a top-notch dividend stock to buy and hold for the next decade-plus.