The holiday season is a time for family, friends, feasting, and for yours truly, football. But it's also time to dust off your thinking cap and make those resolutions that'll put you on track to have a successful 2020 and beyond.
While a majority of folks focus on health-related resolutions as we near the end of the year, one factor bound to improve your health, and allow you to sleep better at night, is to improve your financial foundation. And the best way to do that, in my opinion, would be to focus on the gift that keeps on giving all year long: dividend stocks.
Dividend stocks and Drips are your key to a solid financial foundation
There are four big reasons why publicly traded companies that pay a dividend need to be in your stocking for the upcoming year. To begin with, the fact is that dividend stock simply outperform their non-dividend-paying peers over the long run. A report from J.P. Morgan Asset Management in 2013 found that companies initiating and growing their payout between 1972 and 2012 generated annualized gains of 9.5% over this 40-year period. By comparison, companies that didn't pay a dividend returned a meager 1.6% on an annualized basis over the same time frame.
Secondly, dividend stocks typically have the building blocks an investor is looking for. A company that's sharing a percentage of its profits is unlikely to do so, or continue to do so, if its board of directors doesn't foresee continued growth and/or profitability in the future. Likewise, dividends that have been paid for an extended period of time usually signify a company with a time-tested business model. In other words, a recurring payout is like a dangling lure designed to attract income seekers.
Third, receiving regular dividend payouts can help calm the nerves of skittish investors. There's no mistaking the fact that stock market corrections happen often, and that moves lower in the market tend to be sudden and sometimes violent. Having some level of consistency when it comes to receiving income can help to ensure that investors keep a level head and don't make any rash decisions.
Fourth and finally, but perhaps most importantly, you can supercharge your wealth creation by utilizing a dividend reinvestment plan, or Drip. As my colleague Matt Frankel notes, the ability to reinvest your payouts into more shares of dividend-paying stock comes with a number of advantages, which include:
- Commission-free investment
- The ability to buy fractional shares
- The ability to dollar-cost average into an investment
- Automation of the compounding process
Dividend stocks and Drips are, essentially, the blueprint for long-term investing success.
Consider adding these dividend stocks to your portfolio in 2020
With this in mind, let's look at a handful of dividend stocks that, when set up as a Drip, could put you on track for a profitable 2020 and beyond.
Bank of America
It could rightly be argued that money center banks, which predominantly thrive from growing loans and deposits, are the backbone of the U.S. economy -- and that's good news considering that we're in the midst of the longest expansion of the U.S. economy, dating back 160 years. That's why I believe Bank of America (BAC 0.40%) is one of the more attractive dividend stocks you can consider adding to your portfolio for the long run.
You see, Bank of America was buried under legal settlements and poor-quality loans to begin the decade. However, these one-time settlement and poor loans have been pushed firmly into the rearview mirror. Nowadays, Bank of America is considerably leaner than ever after reducing its physical branch exposure and focusing on digital banking solutions. This reduction in expenses has played a big role in improving its margins and allowing the company to return a significant amount of capital to investors via its dividend and through share buybacks.
Following a drop in its dividend to just $0.01 per quarter during the Great Recession, BofA has rebuilt its payout to $0.18 per quarter. This works out to a 2.1% yield, which is slightly higher than the average yield of an S&P 500 company.
Innovative Industrial Properties
I'm sure the idea of investing in marijuana for dividend income sounds absolutely absurd, especially given the problems experienced by the industry throughout North America in 2019. However, cannabis real estate investment trust (REIT) Innovative Industrial Properties (IIPR -1.01%) has shown that it's not your typical pot stock.
As a cannabis-focused REIT, Innovative Industrial Properties acquires medical marijuana producing and processing facilities across the United States, then leases these assets out for an extended period of time. It's also able to incorporate a modest organic growth component by passing along rental increases each year and charging a property management fee to its tenants that's based on this rising rental base. This year alone, IIP has seen its property count nearly quadruple from 11 to 42, with a weighted-average remaining lease length of 15.5 years and an average return on invested capital of 13.6%. In short, this company should see a complete return on its investments in a little over five years.
Best of all, with U.S. pot stocks having limited access to capital, the sale-leaseback agreements that IIP provides make it a shoo-in to build its portfolio throughout 2020. Having recently increased its payout to $1 per quarter, Innovative Industrial Properties is now paying out a 5.6% yield and has grown its payout by 567% in just the past nine quarters. It's not your average dividend stock, and income investors should really give it a look.
Philip Morris International
Another way to kick-start your wealth creation with dividend stocks is to consider perennial high-yielders, such as global tobacco giant Philip Morris International (PM 0.61%). Philip Morris is currently dishing out $1.17 per quarter, which is good enough for a 5.4% annual yield.
I know what you're probably thinking about the idea of owning a company that sells tobacco, and you are correct, the sales landscape has been challenging. In the U.S., adult cigarette smoking rates have hit their lowest levels in more than 50 years of recorded data. But this isn't as big of a problem for Philip Morris as you'd think. That's because it operates in more than 180 countries around the world, and the U.S. isn't one of them. Despite some developed countries pushing for tougher tobacco legislation, such as Australia, Philip Morris has fallbacks given its access to burgeoning middle classes in China and India. What's more, the addictive nature of nicotine affords Philp Morris incredible pricing power on its products, which helps to counteract any shipment volume weakness.
This is also a company that's done a good job of utilizing innovation to position its product portfolio for growth. Philip Morris' IQOS heated tobacco device was available for sale in 51 markets during the third quarter, and has seen its user base grow from 7.6 million in Q1 2018 to 12.4 million as of Q3 2019. A well-diversified tobacco giant like Philip Morris isn't going away, which makes its dividend one to target.