More often than not, dividend stocks are the engine that powers most successful portfolios. While not always the most exciting or fastest-growing companies, businesses that pay dividends offer a host of advantages to investors.
For one, dividend stocks tend to be profitable and have time-tested business models. A company's board of directors is unlikely to continue sharing a percentage of its earnings or cash with shareholders if it doesn't foresee continued profitability and/or growth in the long-term outlook. This makes dividend stocks a beacon of outperformance, relative to their non-dividend-paying peers.
Owning income stocks can also help long-term investors keep a level head. It's no secret that stock market corrections are pretty common, or that the swiftness of these moves lower can unnerve investors and/or catch them by surprise. However, receiving a regular quarterly or annual payout can help hedge some of this often temporary downside and calm investors' nerves.
Lastly, payouts can be reinvested back into more shares of dividend-paying stock via a dividend reinvestment plan (DRIP). DRIPs allow investors to quickly compound their wealth by increasing their ownership in dividend stocks, as well as their aggregate payouts received. DRIPs are a common strategy employed by money managers to grow the wealth of their clients.
Great dividend stocks can sometimes be found in odd places
Generally, income seekers flock to certain areas of the market if they're looking for superior dividend stocks. The financial sector, tobacco industry, and major wireless providers are good examples of mature businesses that regularly return a lot of their earnings to shareholders.
However, you might be surprised to learn that there are a handful of superior dividend stocks that investors can buy which are found in industries that pretty much never produce top-tier income stocks. Here are three prime examples.
Innovative Industrial Properties
Right now, the marijuana industry is in shambles. What had once been a story of untold growth has come to a crashing halt due to supply issues in Canada and high tax rates in select U.S. states. The end result has been a significant reduction in sales and profitability expectations throughout North America as the black market continues to thrive.
Oh yeah, and then there's cannabis real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR), which has been profitable for quite some time and is one of a small handful of pot stocks to see its sales and profit projections climb throughout the year. It's also the only pure-play marijuana dividend stock. Its current yield of 3.7% is considerably higher than the broad-based S&P 500, and its quarterly payout has risen by an apropos 420% over the past two years ('420' being a term in cannabis culture to describe the act of consuming marijuana).
What makes Innovative Industrial Properties so special is the company's highly predictable cash flow. The company acquires medical marijuana grow farms and processing sites, which is perfect given the lack of financing options available to pot stocks in the U.S., then leases these assets out for very long periods of time. In addition to collecting rental income, it also passes along a 3.25% annual rental increase to its tenants, ensuring it stays ahead of the inflationary curve.
At last check, Innovative Industrial Properties had 41 properties in 13 states, with a weighted-average lease length of 15.5 years and a return on its $410 million in invested capital of 13.8%. It'll take the company just over five years to receive a complete payback on its investments at this rate, with the rest being proverbial gravy for it and its income-seeking shareholders.
Generally speaking, investors don't think about precious metals or mining companies when they think of dividend stocks. Precious metals like gold and silver have no yield, and the highly capital intensive nature of the mining industry often prevents most mining stocks from offering a regular quarterly payout. But don't tell that to copper miner Southern Copper (NYSE:SCCO).
Southern Copper, which operates mines in Mexico and Peru, has a current payout of 4.2%, which is pretty much double that of the S&P 500. Its ability to reward its shareholders with such a robust dividend is the result of a number of factors.
For one, there's the company's sheer size. Southern Copper has the second-largest copper reserves on the planet at nearly 70 million tons. It trails only Codelco, which is owned by the Chilean government. The diversity and expansion capacity of its existing mines and projects has Southern Copper estimating the longest mine life in the entire industry at 70 years.
Furthermore, it also has the lowest cash costs in the industry, according to a company presentation from May. This has to do with Southern Copper selling its by-products, such as zinc and molybdenum, to offset the cost of its primary product (copper).
Copper is also a metal that tends to benefit when the global economy is in expanding. Roughly half of the world's copper heads to China, a country with a historically strong growth rate. In other words, an expanding economy bodes well for the long-term outlook for copper.
More specific to Southern Copper, it's forecasting a 105% increase in copper production between 2018 and 2026, which, if accurate, would likely mean an expansion of the company's existing payout.
Another industry that's often short on prime time dividend stocks is biotechnology. The reason? Aside from the fact that close to 9 out 10 biotech stocks are losing money on a recurring basis, and would therefore not be able to pay a regular dividend, most biotech companies choose to reinvest their operating cash flow into additional clinical research or to make acquisitions. Sharing the wealth, so to speak, through a regular dividend is pretty uncommon.
However, California-based Gilead Sciences (NASDAQ:GILD) enjoys being the odd biotech of the bunch. Although it's not the only biotech stock to pay a dividend, its 3.9% yield is among the highest in the industry. In fact, it actually tops the current yields on a number of Big Pharma names.
How is Gilead able to pay such a robust dividend to its shareholders? The answer lies in its relatively mature business model. Though the company is continuing to invest in treatments for liver diseases and various inflammatory and respiratory ailments, it's come to count on relatively predictable cash flow from its HIV and hepatitis C virus (HCV) segments. Of course, in spite of this predictability, these segments are headed in opposite directions.
HCV, which was once a blazing-hot indication for Gilead, is no more. After capturing the low-hanging fruit in the U.S., the competitive dynamics of the space have changed. Although HCV still accounts for nearly $3 billion in annual sales, it's HIV that's the primary growth driver.
In recent years, Gilead has introduced a number of effective HIV-fighting medicines, the latest of which is Biktarvy. In various late-stage studies of treatment-naïve patients, Biktarvy achieved the primary endpoint of undetectable levels of HIV-1 RNA in between 89% and 92% of patients at week 48. It's this HIV innovation, and the fact that there is no cure for HIV, that should sustain Gilead Sciences healthy dividend for some time to come.