Dividend stocks are not just nice sources of income for today, but have proven to be one of the best ways for individuals to build long-term wealth and establish an income stream that grows over time. The best companies don't just pay a dividend; they have the ability to grow their payout over time, and usually at a higher rate than inflation.
And when those dividend stocks already pay a high yield, it can put you one step ahead of the crowd. To help you get a head start on finding the best high-yield dividend stocks to buy, here is a closer look at three high-quality companies with a dividend yield that's above 4% at recent prices: Brookfield Infrastructure Partners, Pattern Energy Group, and Tanger Factory Outlet Centers.
|Brookfield Infrastructure Partners ( BIP -1.27% )||Infrastructure assets||4.1%|
|Pattern Energy Group ( PEGI )||Renewable energy producer||6.5%|
|Tanger Factory Outlet Centers ( SKT -1.67% )||Mall REIT (real estate investment trust)||9%|
Keep reading to learn what makes these companies unique, and how they would fit in your portfolio.
A recession-proof business with decades of growth potential
The lowest-yielding stock on this list -- 4.1% at recent prices -- Brookfield Infrastructure is also the lowest risk of the three. That's because the nature of the assets it owns -- water, telecom, energy, and transportation infrastructure -- tends to make it very resistant to economic downturns. When times are bad, people and businesses still rely on the basic services that Brookfield's operating businesses provide. Moreover, many of its operating assets are regulated utilities with very high financial and regulatory barriers to competitive entry. That can affect its ability to raise prices and profits, but it also means highly stable cash flows with very little competitive risk.
But Brookfield Infrastructure is more than just a low-risk, recession-resistant business. It also has wonderful growth prospects. The global urban population is growing quickly, and this is creating a pressing need to build more of the kinds of assets Brookfield Infrastructure operates around the world. Estimates are that the global urban middle class will expand by 1 billion people over the next decade alone. Factor in aging infrastructure across North America and Europe that's in dire need of modernization, and Brookfield Infrastructure should have ample opportunities to continue building a bigger cash-generating business in the decades to come.
The yield may be "only" 4.1%, I would expect it to continue growing the payout at a very high rate. Over the past decade, the payout has increased 184%; it's not unreasonable to expect the dividend to double -- at the very least -- over the next 10 years.
Powering the future
Pattern Energy makes money by generating wind and solar energy and selling it to utility companies, and its investors make money from the sizable dividend it pays, as well as the potential for capital appreciation as it grows. But if we go back a couple of years, Pattern's investment thesis was at risk of getting undermined, in large part because the company was a bit too aggressive in growing the dividend and not retaining more of the cash flows to help fund growth projects.
From early 2014 until late 2017, the company raised the dividend every quarter. That's not necessarily bad as long as cash flows are growing quickly enough to cover the payout. The problem for Pattern was, by 2017, the company was paying out essentially all of its cash flows in dividends. That gave it essentially no breathing room if it suffered any interruptions to its cash flows, and required it to utilize more debt and stock issuance to fund growth.
So management put a halt to dividend increases starting in 2018, and has held firm at the current $0.422-per-share quarterly payout since:
Management didn't just stop raising the dividend. The more important step was developing a multiyear plan to continue growing cash flows that wouldn't require any dividend cuts in order to both secure the payout and create a margin of safety going forward.
Less than a year after announcing it, the plan is working; it's actually well ahead of schedule. Pattern has already secured more than $340 million of new assets that are expected to push cash flows above the bottom end of next year's targeted range of $185 million to $225 million. As a result, investors should feel far more comfortable owning Pattern Energy and being able to count on its sizable dividend going forward.
Moreover, the company is likely to return to dividend growth once it attains its stated goal of generating 20% more cash than it needs to cover the dividend. At that point, it's likely to start raising the payout with a portion of future cash flows growth.
And that growth could be enormous. The world's need for energy is only increasing, and efforts to reduce emissions from fossil-fueled power generation are driving development in renewables. Moreover, growth in scale and improvements in technology have renewables on track to reach cost parity with even the cheapest forms of fossil-fuel power generation in the next five years. When paired with energy storage, renewables will be able to meet even more of the world's energy needs.
Put it all together and Pattern Energy is an excellent high-yield investment today, with great prospects to deliver market-beating growth well into the future.
A risk-reward bet on messed-up expectations
I'll be the first to acknowledge that there's some risk with investing in Tanger Factory Outlets. This is a business that's exposed to the impacts of e-commerce, traditional retail shopping, and the risks of a recession on consumer spending. This obviously has concerned investors for some time -- Tanger's shares have lost more than 62% of their value in just over three years:
Investors have sold out of Tanger for obvious reasons. Many malls are suffering from less traffic, and plenty of large retailers have been forced to close stores -- or even been put out of business -- as consumers have increasingly embraced e-commerce. And Tanger hasn't been immune to these things. The company has sold off a number of its underperforming properties over the past several years, and its cash flows have been a bit choppy.
But at the same time, Tanger's results have held up quite well, and its financial profile is strong. It's even been able to keep raising its dividend, even as it has repositioned its portfolio of properties:
While enclosed regional malls in particular have struggled with traffic and losing major tenants, Tanger has consistently reported mid-90% occupancy rates. This points to the difference in managing outlet malls, which continue to see strong traffic, versus regional malls, which are struggling with fewer visitors. Moreover, traditional mall operators count on large anchor tenants (like Sears and J.C. Penney) that are much harder to replace versus the small, more scalable units in an outlet mall.
And discount shopping has traditionally proven more recession-resistant than other forms of retail. That's not to say that Tanger wouldn't suffer from a recession, but with high occupancy rates, a strong balance sheet, and a property base that's already been "right-sized" to the company's focus, the downside risk is lower than the market seems to think.
Mr. Market views Tanger as just another mall operator that will get hammered during the next economic downturn. I think those expectations miss the mark, and Tanger looks like an excellent value for long-term investors willing and able to buy and hold for years. Earning a 9% yield at recent prices should make it much easier to ride out any future volatility.