It is tempting to jump into stocks that have a high dividend yield. However, this is only the first step in the process for income-seeking investors. Many companies have an inflated yield because their stock prices have fallen, which could very well indicate the company's payout is unsustainable. Therefore, that dividend that you thought you were getting may disappear, either partly or altogether.
So, the next item on your checklist is to make sure the business is solid and can continue paying the dividend. Below are two such companies that offer a greater than 4% dividend yield and warrant your consideration.
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1. Walgreens Boots Alliance
Walgreens Boots Alliance (WBA 1.31%) offers an impressive 5.2%. While other companies have slashed their dividends during these challenging times, this company's board of directors increased this quarter's dividend by a penny to about $0.47. It is always encouraging when a company sees fit to increase its payout. When businesses are confronting a lot of uncertainty due to COVID-19 and the ensuing economic fallout, it is even more impressive.
In fact, the latest hike ran Walgreens' annual streak to 45 years. Already a Dividend Aristocrat, it will likely become a Dividend King, which is an S&P 500 Index company that has raised dividends for 50 years, in just a few years.
Walgreens is a leading pharmacy retailer that sells prescription and over-the-counter drugs, plus other items like health and beauty products.
Economic conditions typically do not affect the business, since people always need their medicine. In its fiscal third quarter (ended May 31), Walgreens' sales were flat compared to a year ago at $34.6 billion. This was despite management's estimate that sales were hurt by $700 million to $750 million due to the U.K. government issuing strict stay-at-home orders.
The company's strong cash flow should also give you confidence in its ability to continue paying dividends. For the first nine months of 2020, its operating cash flow was $3.4 billion. After capital expenditures of $962 million, there was plenty left over to pay the $1.3 billion of dividends.
2. Realty Income
Realty Income (O -0.01%) is a real estate investment trust (REIT). This means it has to pay out at least 90% of its taxable income as dividends, making it ideally suited for income-seeking investors.
Paying dividends monthly, the board of directors raised the payout five times in 2019 and twice this year.
Currently paying $0.2335 a month, this equates to a 4.3% dividend yield at the current stock price. Starting this year, Realty Income became part of the illustrious Dividend Aristocrat group.
Leasing properties to retailers is typically fraught with risks. That's because certain retailers have their fates tied to the economy and depend on consumers spending money. Realty Income manages this risk by renting to a diverse mix of sectors, and its top 20 tenants, accounting for about 53% of its rental income, are mostly large, strong retailers. These are companies like Walgreens and Dollar General (DG -0.06%).
That certainly boosts my confidence that Realty Income won't run into a rent collections issue. At the end of the quarter, its occupancy rate was 98.5%, and it collected 86.5% of the rent due in the second quarter, which increased to 91.5% in July. It has weathered government restrictions on retail store activity well.
With its diverse and strong retail tenants, I have confidence in Realty Income's ability to continue paying dividends.
