Buying and holding high-quality dividend stocks is arguably the best way for any investor to predictably generate wealth over the long term. But while some of the world's best-known stocks rightly attract the bulk of the market's attention, some of the most attractive dividend-paying names are much less familiar.
So we asked three top Motley Fool contributors to each find an unknown-but-amazing dividend stock they think shareholders can appreciate today. Read on to learn why they chose Ubiquiti Networks (UI 1.45%), NextEra Energy Partners (NEP -0.14%), and Cedar Fair (FUN 1.95%).
Maybe the newest dividend stock of all
Steve Symington (Ubiquiti Networks): Compared with some of its enormous peers in the wireless networking space, Ubiquiti Networks isn't exactly a household name. But it almost certainly wouldn't come to mind as a promising dividend stock considering the company only just initiated its quarterly payout along with its second-quarter results in late August. That's not to say it's the company's first dividend -- rather, it has paid out two other one-time dividends in 2012 and 2014. But this time the company has pledged to maintain the payout for the rest of fiscal 2019, indicating that it could stick around longer this time.
Ubiquiti Networks is understandably starting small with a quarterly dividend of $0.25 per share, good for a modest annual yield of 1.1% at today's prices. But management made it clear that the dividend is meant to complement the company's existing stock repurchase program, through which it's already repurchased more than $440 million in shares so far in 2018. It's also worth noting the dividend came after Ubiquiti Networks determined that its operating performance and cash flows had already provided more-than-adequate resources to fund those repurchases and its everyday operations, while simultaneously "maintaining a war chest for strategic opportunities."
But that's not even the true beauty of Ubiquiti Networks' business. The company has thrived by disrupting established markets offering high-quality Wi-Fi networking products at low prices -- a consequence of its unique low-overhead model that shuns a traditional sales force and marketing team, instead relying on happy customers to spread the word. That disruption began with its entrance into the enterprise networking industry with its UniFi product line, expanded with the introduction of its consumer-centric AmpliFi products in 2016, and -- according to CEO Robert Pera last quarter -- should continue as the company further improves its operations and expands into new networking verticals such as network security.
For investors willing to buy now, collect the dividend, and watch Ubiquiti Networks continue to disrupt the broader networking industry, I think the stock should perform well in the coming years.
The next-generation energy dividend
Travis Hoium (NextEra Energy Partners): Utilities have been a much more volatile business than investors may have anticipated over the last decade, as slow consumption growth and renewable energy have dented traditional growth in assets and, therefore, returns. Instead of traditional utilities, yieldcos have become a great way to invest in safe power generating assets with consistent long-term cash flows. One of the best is NextEra Energy Partners, which owns 4,700 megawatts (MW) of renewable power generating capacity.
What makes yieldcos unique is that they own assets that have long-term contracts to sell power to utilities. In the case of NextEra Energy Partners, it has an average of 17 years remaining on contracted energy sales, which ensures its 3.9% dividend yield will remain intact for a long time. Not only is the dividend great, but early dividends from yieldcos are also known as "return of capital," so dividends paid are expected to be tax-free for at least the next eight years.
NextEra Energy Partners is also unique in the yieldco space because it has a long growth runway because of the assets parent NextEra Energy can drop down to fuel growth. Management says the company has visibility to 12% to 15% dividend growth annually through at least 2023. This isn't just a safe long-term dividend because of the contracted cash flows, it's a growth dividend, which is something that's hard to come by in the utility business today.
A regional theme park leader
Leo Sun (Cedar Fair): Cedar Fair is the third-largest amusement park operator in the United States. It owns and operates 11 amusement parks, two outdoor water parks, one indoor water park, and four hotels across nine states and Toronto, Ontario.
The company is a master limited partnership (MLP) that pays a whopping forward yield of 6.6%. Cedar Fair has raised that dividend (technically a distribution) for five straight years. Cedar Fair spent over 100% of its free cash flow on its distributions over the past 12 months, which might seem like a red flag. However, the spike was mostly caused by an unexpected slowdown in the first half of 2018, when its revenue fell 1% year over year and it posted a net loss.
Cedar Fair attributed those declines to adverse weather conditions, a delayed ride opening at California's Great America, lower season-pass sales at Kings Island, and higher labor costs. But looking ahead, it believes that seasonal events between October and December should significantly boost its park attendance levels, while new upgrades and renovations to its resorts lock in more visitors.
Cedar Fair might look like a wobbly investment, but the company's business has rebounded from short-term dips for over three decades. The stock isn't for queasy investors, but it already dropped 20% this year, its yield is at a multiyear high, and it trades at just 16 times forward earnings. If Cedar Fair's turnaround efforts pay off, investors could be getting an amazing dividend stock at these prices.
The bottom line
Of course, we can't absolutely guarantee that these three dividend stocks will go on to beat the broader market. But whether we're talking about Ubiquiti Networks' disruptive model, NextEra's steady business with healthy cash flows, or Cedar Fair's long history of operating success and raising its already generous dividend, we like their chances of doing exactly that. And we think patient investors would do well to buy and hold shares today.