Dividend stocks can be wonderful. Dividends can provide current income or, when reinvested, they can help power total capital appreciation. But you need to tread carefully once you get into higher-yielding dividend stocks. Many are quite risky and/or their growth prospects are very limited to nil.
Two higher-yielding dividend-paying stocks that aren’t overly risky and have decent growth potential are Realty Income and Iron Mountain. Both companies are organized as real estate investment trusts (REITs), which means they must pay out at least 90% of their income as dividends in return for their preferential tax treatment.
|
Company |
Market Cap |
Dividend Yield |
5-Year Beta* |
YTD 2017 Total Return |
3-Year Total Return |
10-Year Total Return |
|---|---|---|---|---|---|---|
|
Iron Mountain (IRM 0.91%) |
$10.8 billion |
5.52% |
0.85 |
29.8% |
52.9% |
173% |
|
Realty Income (O 1.94%) |
$16.3 billion |
4.36% |
0.31 |
6.5% |
53.8% |
286% |
|
S&P 500 |
-- |
1.88% |
1.0 |
12.7% |
32.8% |
113% |
Data sources: Yahoo! Finance and YCharts. Data to Sept. 11. *Beta is a measure of stock-price volatility relative to the overall market, which has a beta of 1.0. YTD = year to date.
The industry's largest record and data storage company: 5.5% dividend yield
Iron Mountain provides storage, primarily of paper and digital records, and information management services for companies and government entities. The Boston-based company also has related businesses, such as data centers. It has more than than 1,400 facilities located in 52 countries that serve more than 230,000 customers, including more than 95% of the Fortune 1000 companies.
Image source: Getty Images.
In July, the company announced plans to make its first ever data center acquisition. Its acquisition of FORTRUST, a leading provider of multi-tenant data center space in the mountain states region of the United States will expand Iron Mountain's footprint into the western part of the country. Iron Mountain's expansion of its data center business is a plus, as this business has greater growth potential than its rather mature records storage business.
Iron Mountain's core business provides an essential service. Companies and government entities need to store certain records off-site to comply with regulations, and as part of their contingency planning, which makes this business resistant to economic downturns. Customers tend to not change service providers, leading to low turnover. Couple these factors with relatively low maintenance costs and you get a core business that provides predictable, low-volatility income.
Iron Mountain stock has returned 16.7% since I last recommended it on March 4, crushing the S&P 500's 5.8% return in this six-month-plus period. This is an especially strong performance given the Federal Reserve has raised interest rates twice so far this year, with a third hike widely predicted before the year ends. REIT stocks began pulling back about a year ago due to expectations of higher interest rates. (When rates rise, bonds become more attractive as income-generating investments.) Given the expectation of higher rates ahead, it's particularly important for REIT investors to take a longer-term investing view and choose higher-quality REITs.
Image source: Realty Income, "The Monthly Dividend Company."
An REIT focused on stable retailing occupancies: 4.4% dividend yield
Realty Income, which focuses on free-standing properties, has 5,028 properties in 49 U.S. states and Puerto Rico, with retailing occupancies generating 80% of rental income at the end of the second quarter. The San Diego-based REIT's portfolio is diversified by tenant type and concentration, as well as by geography. Its largest tenant -- Walgreens -- accounted for just 6.7% of its total rental income in the most recent quarter.
Realty Income targets tenants whose operations help protect them from online competition, such as gyms and other service-based businesses, and tenants that are resistant to economic downturns, such as pharmacies. It executes long-term, triple net leases, meaning tenants pay variable costs, such as maintenance and insurance. The use of these leases along with extremely high occupancy rates -- 98.5% at the end of the second quarter -- and low tenant turnover results in a portfolio that generates a consistent and predictable income stream.
Thanks to its predictable and growing income stream, Realty Income has increased its total annual dividend payout for 23 consecutive years. It pays its dividend in monthly installments, a big plus for many income-oriented investors.
