Dividend stocks are typically associated with mature industries that have slow, steady, boring growth. Not all dividend stocks are stodgy plodders, though. Some are at the forefront of major changes in their industries that will propel growth for years to come.
Here are three companies that provide a dividend and some stock price upside as their markets develop. These are not necessarily household names, but they are leaders in their industries.
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1. Digital Realty Trust: Providing a home for data centers
Digital Realty Trust (DLR +1.76%) is a data real estate investment trust (REIT), which means it provides co-location and interconnection services for a variety of customers. Digital Realty Trust operates data centers, which are essentially server farms in urban areas. The company's biggest customers include Facebook, Verizon, and Oracle.
Data center REITs benefit directly from increased internet traffic, and the coronavirus crisis has accelerated trends that were already in place, such as remote working, cloud storage, and videoconferencing. The Internet of Things, 5G, autonomous vehicles, and artificial intelligence efforts will also drive demand for additional digital capacity.
The company has been acquiring competitors globally, most recently completing its merger with European data center provider Interxion. Digital Realty Trust stock is up 21% so far this year and pays a 3.1% dividend yield.
2. Invitation Homes: Benefiting from two big housing trends
Invitation Homes (INVH +0.74%) is a REIT that purchases single-family homes and rents them out. The coronavirus pandemic has changed attitudes toward living in crowded urban areas. While the trend toward suburban living had been building for some time, the pandemic really accelerated the process.
The reason to like companies like Invitation Homes (and competitor American Homes 4 Rent) is that they are at the forefront of consolidating what has been a fragmented market. Historically, single-family rentals were dominated by mom-and-pop landlords who would own one or two properties. Scaling the concept had always been difficult. With the advent of big data, companies like Invitation can slice and dice a metropolitan statistical area and select the most attractive properties with the best risk/reward characteristics.
Invitation Homes will be riding two big long-term trends: the migration out of cities into the suburbs and the consolidation of single-family rentals. After a big ramp up in stock price (more than 60% gains) during 2019 and the start of 2020, the stock plunged roughly 50% during the market downturn in March, but it is up about 76% from those mid-March lows and still climbing. It has a 2.1% dividend yield, and it has seen tenants continue to pay rent in the downturn.
3. PennyMac Financial: Riding the refinancing wave
PennyMac Financial Services (PFSI +3.57%) is a mortgage originator in the midst of one of the biggest refinance waves the industry has ever seen. With the aggressive actions out of the Federal Reserve, mortgage rates have fallen below 3%, and most homeowners can save money by refinancing.
This means that mortgage bankers are inundated with business and are able to raise prices. Record volumes and record profits are the best of all worlds. PennyMac will probably benefit from the added interest in mortgage banking when Rocket (i.e., Quicken) issues stock to the public. Given that the Fed envisions rates staying at ultra-low levels through 2022, this refinancing wave will have legs.
In addition, we may finally see a wave of homebuilding as the supply/demand imbalance for homes is at record levels. Note that PennyMac doesn't hold the mortgages it originates; it sells them to its sister REIT PennyMac Mortgage Trust or securitizes and sells them in the market to investors. PennyMac Financial Services is up 30% year to date, and it pays a 1% dividend yield.
Dividends and stock price gains do mix
Dividend stocks don't have to be boring, stodgy companies like public utilities and consumer nondiscretionary stocks. The ideal dividend stock is one that operates in a healthy sector, is growing, and has the possibility of providing capital gains and dividend increases. These names should be in a position to provide exactly that.
