Dividend stocks are a natural choice for investors who want their portfolio to generate reliable income. However, not every dividend stock is worth owning, so it's important for investors to be picky about which stocks they choose to buy.
So, which dividend stocks look good right now? We asked a team of fool.com contributors to weigh in, and they picked Annaly Capital Management (NLY 1.38%), Digital Realty (DLR +0.47%), and Brookfield Infrastructure Partners (BIP 2.27%).
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A riskier bet on high dividends
Dan Caplinger (Annaly Capital Management): Real estate investment trusts are typically a smart place to look for high yields, and REITs that focus on investing in mortgage-backed securities have historically had some of the best yields of all. Annaly Capital Management sports a dividend yield of more than 11% right now, and that figure has routinely been in the double digits for years.
Smart dividend investors understand that high yields can sometimes be a sign of danger, and Annaly doesn't come without risk. As a highly leveraged mortgage REIT, Annaly relies on the credit markets to borrow money that it uses to buy more mortgage-backed securities. In good times, that strategy is highly successful, but Annaly has faced challenges in the past during less favorable periods for interest rates and the economy.
After initially seeing its stock drop with short-term interest rates on the rise, Annaly is showing signs of resilience. Thus far, the slow but steady nature of rate hikes from the Federal Reserve has allowed mortgage REITs to make appropriate plans, and Annaly in particular has less leverage than some of its peers in the space. Moreover, Annaly has experience that many of its newer peers lack in dealing with a tougher credit environment. Even though share prices could fall further if rates start to rise more quickly, Annaly's ample dividend yield offers an attractive risk-reward balance that some income investors will feel comfortable taking.
A different kind of tech stock
Matt Frankel (Digital Realty): You may not think of real estate as an exciting technology play, but if you buy a real-estate investment trust like Digital Realty Trust, that's exactly what you're getting.
Digital Realty owns and operates data centers, which are facilities designed to reliably and securely house servers and other network equipment. Space is leased out to tenants, including companies like Facebook, Verizon, Uber, and many more -- in fact, Digital Realty has over 2,300 customers altogether renting its 32 million square feet of space.
When you post a photo album to your favorite social media site, for example, that data has to be stored somewhere. And over time, data has become more sophisticated, requiring even more storage space.
Going forward, the growing need for data centers isn't expected to slow down. Far from it, actually. The number of internet-connected devices is expected to grow by 82% over the next two years, and the markets for data-heavy tech such as autonomous vehicles, virtual reality, and artificial intelligence are long-tailed growth opportunities that could cause the data center industry to multiply in size several times over.
In a nutshell, Digital Realty has the growth potential many investors want from their tech stocks, but with a 3.8% dividend yield that should get even bigger as time goes on.
A high-yield stock in growth mode
Brian Feroldi (Brookfield Infrastructure Partners): While I'm not a big fan of high-yield stocks in general, one dividend monster I hold in very high regard is Brookfield Infrastructure Partners. The company owns a diverse set of infrastructure assets that are spread around the world and includes things like cell towers, toll roads, railroads, irrigation facilities, and many more. What all of these assets have in common is that they provide an essential service and are truly one of a kind. These attributes keep a lid on competition and allow Brookfield to crank out predictable cash flow in all phases of the economic cycle.
Brookfield's model is to use debt, equity, and internally generated funds to buy assets at depressed prices and then turn them into cash flow machines. The company boasts a long history proving that its model works like a charm. Brookfield's funds from operations (FFO) have grown at a 20% annualized rate on a per-share basis over the last decade. The strong profit growth has allowed the company to grow its distribution (dividend) by 12% annually while still producing gobs of cash flow that can be reinvested back into the business.
Perhaps it's no wonder the company has consistently produced market-beating returns for long-term investors:
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In its most recent quarter, the company claimed it had $4 billion in total liquidity that it is ready to deploy to drive future growth. That's a big number when compared to the company's current enterprise value of "just" $21 billion, so I think investors can continue to expect double-digit profit growth for the foreseeable future. Adding in a dividend yield of 4.6% and the fact that shares are trading near their 52-week low only increases my conviction in this company's chance to continue to outperform.
