The Holy Grail for income investors is finding quality companies with significant payouts that will continue to generate income over the long haul. It's important to remember, though, that companies with large dividends are not all created equal. In some cases, a high yield can be a red flag that indicates trouble in the underlying business.
Separating the wheat from the chaff can be an arduous and time-consuming process, but we're here to help. We asked three Fool.com contributors to choose top companies with high payouts. Read on to find out why they chose Carnival Corporation (NYSE:CCL), The Procter & Gamble Company (NYSE:PG), and Digital Realty Trust (NYSE:DLR).
Set sail for this 3% yield
Demitri Kalogeropoulos (Carnival): Worries about rising fuel prices have pushed Carnival's shares lower this year while helping lift its dividend yield back above 3%. However, there's nothing in the cruise ship giant's recent operating results to suggest that there is anything fundamentally wrong with the business.
On the contrary, sales growth just trounced management's forecast for the second straight quarter thanks to healthy vacation demand. Carnival is also finding more ways to spur onboard spending, with that category up by double digits in the fiscal second quarter.
Sure, fuel costs will hurt profits if oil prices continue trending higher, but Carnival isn't struggling to pass on its core expenses to its customers. In fact, management raised its full-year outlook on June 25, and it now expects net revenue yields to rise 3% while cruise costs (excluding fuel) expand by just 1%.
Over the long term, Carnival is aiming to lessen its exposure to oil prices by building more fuel-efficient ships. There are 18 of these vessels set to launch over the next five years, which should mark a steady pace that will protect profitability by matching supply growth with demand. Meanwhile, a bit of earnings volatility is a small price for investors to pay for an above-average yield and a strong underlying business.
Invest in this household name
Dan Caplinger (Procter & Gamble): In the consumer products space, it's hard to find a bigger stock than Procter & Gamble. The company sports almost two dozen billion-dollar brands globally, with products like Pampers diapers and Crest toothpaste found in households around the world. The consumer giant is a member of the Dow Jones Industrial Average and generated revenue of more than $66 billion over the past 12 months, with a global presence few competitors can match.
On the dividend front, Procter & Gamble is also exceptional. The stock currently yields 3.7%, and the company has been generous in sharing its long-term growth with shareholders through regular dividend increases. For 62 straight years, shareholders in P&G have gotten annual payout boosts, including a 4% rise this past spring to $0.7172 per share quarterly. That not only makes P&G a Dividend Aristocrat, it also puts it among the top half-dozen stocks with the longest dividend-increase streaks in the market.
Procter & Gamble has experienced some struggles lately, which explain its slumping share price and rising yield. Yet the company has a long-term strategy that includes focusing on its most successful brands. That looks promising, and it creates an opportunity for would-be P&G investors to buy in at relative bargain prices in hopes of success over the long haul.
Leveraging cloud growth
Danny Vena (Digital Realty Trust): It can be difficult for dividend investors to find an income payer that offers a high yield, the opportunity for growth, and a level of security. One way to narrow the field is by looking among a group of companies that have qualified for special tax treatment known as real estate investment trusts (REITs). These tax-advantaged businesses are required by the IRS to pay out at least 90% of their profits to investors as dividends.
One such REIT with a long runway is Digital Realty Trust, a company focused on the growing field of data centers, which are large, specialized buildings that house the servers and other network equipment used in cloud computing. These locations require highly reliable and secure environments that contain redundant backup systems for mechanical, cooling, electrical, and network connections -- all necessary to protect the data stored on the servers.
The market is large and growing, with worldwide public cloud revenue expected to grow to $411 billion by 2020, up from just $260 billion last year. Ongoing developments in the areas of artificial intelligence, the Internet of Things, self-driving cars, and virtual and augmented reality are expected to accelerate the need for additional data centers in the coming years.
Digital Realty provides over 200 data centers in 12 countries and 32 metropolitan areas, totaling 32 million rentable square feet. The company has built in annual rent increases of between 2% and 4%, and its average remaining lease is 4.9 years.
Even more impressive is the company's growth. It has increased its FFO (funds from operations -- the REIT measure for earnings) by 12.3% annually over the past 12 years. Digital Realty Trust has grown its dividend at about the same rate, and its payout currently yields 3.6%.
The company's customer list reads like a Who's Who of the tech and telecom industries, boasting IBM, Facebook, Verizon, AT&T, and Comcast among its top clients.
With a high yield, a significant runway for growth, and a stable and growing payout, Digital Realty Trust is a top stock to buy now.