Investing in dividend stocks is an incredibly powerful way for investors to build wealth over the long term. Companies that pay you for owning the stock provide you with money you can then reinvest in that stock, which can compound over decades and turn a relatively modest investment into a comfortable nest egg that continues to throw off cash. To really kick that investing method into high gear, look for stocks with higher dividend yields.
For this kind of investing to be effective, investors need to identify great stocks that will have the ability to pay them for years down the road. So, we asked our investing contributors to each highlight a stock they see as a great high-yield investment. Here's why they picked 8Point3 Energy Partners (CAFD), Anheuser-Busch InBev (BUD 0.06%), and Target (TGT 0.16%).
A hefty yield in a holding pattern
Tyler Crowe (8point3 Energy Partners): Solar power yieldco 8Point3 Energy Partners is in an odd place right now. Both of its sponsor companies -- First Solar and SunPower -- are looking to unload their positions in their subsidiary to focus on manufacturing panels instead of developing entire solar projects. By not developing projects in-house, it doesn't make sense for the two to own a subsidiary with the sole purpose of owning and financing projects. As a result, the yieldco probably won't grow much until these issues are resolved or the business gets sold.
I can certainly sympathize with anyone who would view that situation and say no thanks. Buying into a company without a growth plan in place and parent organizations that want to sell don't sound appetizing. That said, there is some value in the company and its 7.1% yield for investors who are willing to wait for a decision.
One thing that is reassuring about the company's quagmire is that the company has the revenue and cash flow to stay in a holding period for a while. Last quarter, the company made enough cash from operations and contributions from nonconsolidated affiliates (that's cash payments from companies that have controlling stakes in an asset) to cover its capital investments and all its distributions to shareholders and its parent companies. Therefore, if nothing were to happen for several quarters, 8Point3 could exist in this state for a while without much trouble.
If you are looking for a strong cash-generating asset that can continue to pay for a long time with the potential upside of a buyer, take a look at 8Point3 Energy Partners.
Here's to beer
Daniel Miller (Anheuser-Busch): For income investors, finding a massive company with global reach, dominating scale, and a hefty dividend yield to boot is almost as good as it gets. That's precisely what Anheuser-Busch InBev has to offer, and its 3.5% is plenty to entice dividend hunters.
For those unaware, Anheuser-Busch is the largest brewer in the world and even one of the world's top five consumer product companies, at least when measured by EBITDA. Thanks to the addition of SABMiller into its already massive portfolio of beverages, it owns half of the top 10 beer brands by sales and boasts over 18 brands with retail sales topping $1 billion -- pretty incredible. With scale and reach as wide and far as Anheuser-Busch has, it can easily drive a material cost advantage over the competition. Consider that Anheuser-Busch actually buys 8% of the U.S. rice crop annually, per Morningstar.com citing the Rice Almanac -- that type of leverage is unheard of and unrivaled.
With its brand power in place, incredible scale, and purchasing power, it now has the ability to be selective about growth through acquisitions. One possible route for the beverage giant to go will be acquisitions of more premium beer brands. It's seeing growth with its premium Michelob Ultra and Stella Artois in Mexico and other developing countries. Ultimately, for income investors, Anheuser-Busch is easily a top stock with a strong dividend yield -- and don't expect that to change anytime soon.
A national retailer with a big yield
Demitri Kalogeropoulos (Target): Target has increased its dividend each year for 50 consecutive years, which is more than enough time to earn it a spot as a Dividend Aristocrat. That rock-solid income streak persisted through several recessions and even a few own goals on the part of management -- including its recent failed expansion into Canada. Target's payout is also in no danger of a cut or pause despite the latest struggles with weak sales growth.
After all, Target's business prospects are brightening right now. The company just raised its 2017 outlook after stores attracted healthy customer traffic over the holidays. These shops also acted as efficient fulfillment hubs for its booming online sales channel. Nearly three-quarters of online orders were either picked up at or shipped from one of Target's stores. And if that operating success sounds familiar, it's because it broadly tracks the way rival Wal-Mart (WMT -1.72%) has achieved its improved growth rate in the past year.
Target is predicting modest sales gains in 2018 that are in line with Wal-Mart's expansion pace. Earnings won't be impressive for either retailer, since they're both prioritizing business investments on things like wages and the online sales channel. Yet income investors might prefer Target stock given that its 3.2% yield is significantly more generous than Wal-Mart's 2%.