One of the more significant financial priorities of parents is saving money for their children's college. Opening an account such as a 529 savings plan or a Coverdell ESA is easy enough. However, parents will likely need guidance on how to invest their contributions.
Assuming parents have made these considerations for a newborn, they need investments likely to rise substantially over a period of about 18 years. Hence, these investors need businesses that should continue to prosper for at least that long.
Also, one other strategy for saving is finding stocks with a long track record of dividend payments. Not only does this indicate company stability, but it can also generate a cash return. With this cash, these investors can manifest a virtuous cycle of more share purchases and higher income. Many of these stocks also beat the average dividend yield for the S&P 500 of just under 2.1%.
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Moreover, one popular vehicle within the realm of dividend stocks are real estate investment trusts (REIT). These real estate companies pay at least 90% of their net income in dividends in exchange for paying no corporate taxes. Furthermore, in many college savings plans, investors do not have to pay taxes on any dividends.
For savers looking for both growth and income, AbbVie (ABBV -0.56%), Innovative Industrial Properties (IIPR -0.74%), and Realty Income (O 0.12%) are three such stocks on which one can build these savings.
1. AbbVie
Once known as the pharma subsidiary of Abbott Laboratories, AbbVie spun off into a separate company in 2013. For most of its history as AbbVie, this pharmaceutical stock relied primarily on Humira to generate revenue. However, with Humira patents expiring across the world, investors sold the stock as uncertainty mounted about how it would generate income after Humira.
The company has begun to address this concern with new drug development. Now, the hematologic oncology drugs Imbruvica and Venclexta have seen massive sales growth over the last year. The company has additional drugs in its pipeline as well.
AbbVie is also attractive from a financial standpoint. Its 8.7 times forward P/E ratio is lower than its five-year average of 11.1. With profits expected to increase by an average of almost 4.9% per year over the next five years, the earnings growth rate indicates a reasonable valuation for the company. The current stock price of just under $85 per share is more then one-quarter below the stock's 2018 high.
Also, this year's annual dividend of $4.72 per share translates to a yield of about 5.6%. Moreover, thanks to its history as part of Abbott, the company has increased its dividend every year for 47 years, making it one of the more prominent Dividend Aristocrats. Since the payout ratio, or percent of profits going to dividends, amounts to approximately 49.1%, the company can afford to continue this streak for the foreseeable future.
2. Innovative Industrial Properties
Innovative Industrial Properties has become one of the more creative investment vehicles from the marijuana boom. Instead of investing directly in growers, Innovative Industrial is a REIT that owns real estate designed for cannabis production.
This affords it some advantages. As a REIT that pays dividends, it not only avoids the volatility of most marijuana stocks, but it also circumvents the Schedule I restrictions hampering the U.S. marijuana industry.
Moreover, the hemp used in cannabidiol (CBD) products is a form of cannabis. Thanks to the legalization of hemp, this company can now operate in all 50 states. The company currently owns 38 properties in 15 states.
As of this writing, it trades in the $75 per share range. This is a 45% discount from the highs of last summer. Considering that analysts expect profit growth of 87.7% this year and 44.4% in fiscal 2021, its valuation of 21 times forward P/E ratio appears reasonable.
Moreover, being a REIT that earns a profit, it has dividend obligations. Its $4 per share payout yields just under 5.3%. Furthermore, though the payout ratio stands at about 107.2%, investors should not assume that the company cannot pay the current dividend. Net income factors in non-cash depreciation charges, meaning adjusted funds from operations (AFFO) income serves as a more accurate metric for determining the ability to pay dividends. In the most recent quarter, the company earned $1.12 per share in AFFO income. This leaves it well-positioned to cover the current dividend.
As hemp use grows and more jurisdictions loosen restrictions, it will likely fuel continued expansion for Innovative Industrial Properties.
3. Realty Income
Realty Income is a REIT that acquires free-standing commercial properties than generate income under long-term lease agreements. Admittedly, the fact that this company specializes in retail real estate may cause some concern. Still, while e-commerce may reduce demand for real estate, the popularity of omnichannel retail ensures that in-store retail is not going away.
Billing itself as the "monthly dividend company," this business model has allowed the company to generate monthly dividend income for nearly 50 years. With a 24-year history of annual dividend increases, it could gain Dividend Aristocrat status next year. Also, given the company's REIT status, investors can rely on continued payouts.
As of now, this annual payout of $2.80 per share yields about 5.3%. Despite technically operating at a payout ratio of approximately 182.5%, the company generates enough income to pay the dividend thanks to higher AFFO income. AFFO came in at $0.88 per share for the most recent quarter.
At a 33.8 times forward P/E ratio, it may seem like a pricey stock. Also, with earnings expected to grow by only 5.45% per year over the next five years, investors can find higher growth at a lower multiple.
However, the stock has become less expensive. The current multiple comes in well below Realty Income's five-year average forward P/E of around 46. As a result, Realty Income trades at about $55 per share, more than 35% below its February high.
Given its resiliency in a challenging market, its decades-long track record of payout hikes, and its discounted price, Realty Income will likely continue to deliver both income and growth to parents looking to fund a child's education.
