Though investors have dealt with some wild vacillations in the stock market before, nothing could have prepared them for what 2020 has offered thus far. Since mid-February, the widely followed S&P 500 lost more than a third of its value in less than five weeks, then proceeded to regain more than 80% of what was lost over the subsequent 11 weeks. It was the fastest bear-market descent in history followed by one of the most ferocious rallies on record.
But if there's a lesson to be learned from this mess (other than the fact that downside catalysts are virtually impossible to predict), it's that buying great companies and holding them for long periods of time is the best way to build wealth in the stock market. And there are few better ways to build wealth over the long run than owning dividend stocks.
Dividend stocks are a smart buy in a volatile market
Buying dividend stocks comes with a number of advantages. For instance, companies that are willing to share a percentage of their profits with investors typically have time-tested business models and expect to remain profitable for the foreseeable future.
Additionally, dividend income can help to partly hedge the inevitable stock market corrections that crop up from time to time. A consistent payout serves as a reminder to investors that a company is financially sound, and it can keep folks from making a rash decision that they'll later regret, such as panic-selling a great company.
Dividends can also be reinvested via a dividend reinvestment plan (DRIP) to compound your wealth. This is a strategy most top-tier money managers use to generate wealth for their clients.
And finally, dividend stocks outperform. According to a 2013 report from Bank of America/Merrill Lynch, publicly traded companies that paid and grew their dividend between 1972 and 2012 averaged an annual return of 9.5%. By comparison, non-dividend-paying stocks returned a meager 1.6% over the same period.
Ideally, we want the highest yield possible with the least amount of risk. Unfortunately, risk and yield tend to be correlated. This means high-yield dividend stocks (those with yields of at least 4%) should be given extra care and scrutiny.
But that doesn't mean there aren't great high-yield income stocks. If you're looking to add a few great high-yield companies to your portfolio for the second half of 2020, consider buying these three stocks.
First up is regional banking giant U.S. Bancorp (NYSE:USB), which was paying out 4.7% to its shareholders as of this past weekend.
There's no question that the banking industry is going to face some challenges in the quarters ahead. We're liable to see consumer and enterprise loan delinquencies rise, and it'll come at a time when interest income for banks will decline due to record-low interest rates. But the capital-rich U.S. Bancorp is ready to take on whatever is thrown its way.
Unlike the big four money-center banks (JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup), U.S. Bancorp managed to avoid the temptation of riskier derivative investments during the financial crisis, and therefore emerged from the previous recession must faster and in considerably better financial shape than its peers. This is a big reason U.S. Bancorp's return on assets continue to consistently outpace all four of the U.S. major banks.
Another selling point for U.S. Bancorp is that it's done an excellent job of controlling its noninterest expenses. This is a company that's seen a growing number of consumer banking transactions occur online or through its mobile app, which is great news considering that online or mobile transactions are a fraction of the cost of in-person transactions. As a result of this growing digital presence, some of its physical branches have become expendable, which is also saving the company money.
At only 19% above its book value (it's been valued at closer to 2 times book value in recent years), U.S. Bancorp is at its cheapest valuation since the financial crisis more than a decade ago. It's ripe for the picking for income seekers.
Innovative Industrial Properties
When you think of high-growth, high-yield dividend stocks, a name that should come to mind is cannabis-focused real estate investment trust Innovative Industrial Properties (NYSE:IIPR). The only pure-play pot stock to pay a dividend was yielding 4.8% as of this past weekend. And yes, this includes the recently announced 6% quarterly payout increase to $1.06 a share.
Innovative Industrial's business plan is to acquire production and processing assets in the U.S. marijuana industry and lease them out for long periods of time. IIP is then able to reap the benefits of predictable rental income, as well as pass along management fees and annual rental hikes.
To date, Innovative Industrial Properties owns 57 properties in 15 states, with a weighted-average lease length of 16.1 years. Although it no longer reports its average yield on invested capital, it stood at just above 13% during the first quarter of 2020. Given that it's a low-cost business model, IIP should net a complete payback on its invested capital in less than six years.
Innovative Industrial Properties has also benefited in a big way from sale-leaseback agreements. With Congress unable to pass cannabis banking reform legislation, multistate operators have turned to IIP to help raise cash. In a sale-leaseback agreement, IIP acquires an asset for cash, then immediately leases it back to the seller for an extended period of time. It's a win-win for both parties.
With IIP expected to remain aggressive on the acquisition front, and having more than 99% of its available square footage leased for the long term, it's easy to see why it's a high-yield stock you'll want to own.
Finally, income seekers should really consider buying into telecom stalwart AT&T (NYSE:T), which as of this past weekend was paying out a delectable 7.2% annually. At this yield, dividend reinvestment would double an investors' money in 10 years, assuming a static share price.
While there's no denying that AT&T's heyday of growth is long gone, it doesn't mean there aren't tricks up this old dog's sleeve.
For instance, AT&T should receive a shot in the arm in the organic growth department from the rollout of 5G networks. While upgrading the company's wireless infrastructure will be costly and ongoing, the reward will be visible in the sales and profit column. That's because some of AT&T's juiciest margins are derived from its wireless plans. If consumers and enterprises consume more data, it's only going to mean better margins for AT&T's wireless division.
And don't forget: This isn't a one-year uptick in growth. As the first major upgrade to wireless infrastructure in about a decade, we'll be looking at a multiyear tech-upgrade cycle that'll drive data consumption higher for years to come.
AT&T also stands to benefit from its push toward streaming content. Its DIRECTV subsidiary has been an unfortunate victim of cord-cutting. However, the recent launch of HBO Max, which has more than 10,000 hours of premium content, should be a key tool to offset cord-cutting losses and keep users within its content ecosystem.
Despite abandoning its share buyback program to conserve capital, AT&T has been adamant that, as a Dividend Aristocrat, it wouldn't reduce its dividend. Considering that its payout ratio in 2020 is still a reasonable 65%, there should be no worry among investors about this payout.
Translation: Buy AT&T with confidence.