Dividend stocks are like the comfort food of investing.
They don't need to be particularly flashy, nor do they have to be the fastest-growing companies. They just need to be solid, reliable, and capable of generating steady growth. If they can deliver high yields, even better.
Few investor classes count on the stable, income-producing qualities of dividend stocks more than retirees. And for older investors looking for options that offer both reliable income streams and growth, three excellent choices are Target (NYSE:TGT), Starbucks (NASDAQ:SBUX), and Innovative Industrial Properties (NYSE:IIPR).
Perfectly navigating the retail revolution
If you think Target is just a stodgy big-box chain, think again. It has undergone a transformation in the last few years focused on using its stores to fulfill online orders, and that strategy has helped the company build a number of competitive advantages. The stock has tripled over the last three years, and e-commerce and same-day-fulfilled orders have soared during the pandemic. Initiatives like drive-up pickup have proven hugely popular with customers as well. Not only have those services helped drive a boom in sales, but they are also generating higher margins for Target than competitors like Amazon and Walmart receive from online orders, which should help further propel the stock's growth.
From the income-investor perspective, Target's no slouch either. It's a Dividend Aristocrat with a 47-year streak of annual payout increases. Management would be loath to lose that coveted status, and there's no reason it should need to. The company is generating bumper profits, and will emerge from the pandemic with sizable market-share gains.
Earlier this year, Target raised its dividend by 3%, a modest hike, but that may have been more reflective of uncertainty around the pandemic than anything else. The company also recently said it would begin repurchasing shares again, a bullish sign for future dividend increases.
Today, Target offers a modest dividend yield of 1.6%, which is slightly below the S&P 500's average of 1.7%, but the company makes up for it with its growth potential and reliability.
A coffee empire
Starbucks has been tested by the coronavirus pandemic, which has generally hammered restaurant stocks, especially those like the coffee chain that are largely dependent on commuters. However, the java giant looks poised to emerge from this crisis in a stronger position, as independent cafes have been hit especially hard, and those don't have the digital infrastructure, loyalty program, or balance sheet that Starbucks does. Additionally, the company has recovered from the pandemic faster than it expected to. Its comparable sales were down just 9% in its latest quarter.
As a dividend stock, the coffee chain has almost everything you could ask for: A dominant global brand; a business based on repeatable purchases of a timeless product; sizable profit margins; growth opportunities in China and elsewhere; and a history of innovation in technology and digital channels.
The company has raised its quarterly payout every year since it first introduced a dividend in 2010, generally by a generous amount. Even during the pandemic, management boosted the dividend by nearly 10%.
It currently offers a yield of 1.9%, but investors should expect that payout to grow steadily based on the company's track record and the fact that management is targeting long-term annual earnings-per-share growth of at least 10%. Additionally, sales are likely to boom when the pandemic ends. In fact, the company is targeting comparable sales growth in the 18% to 23% range for its fiscal 2021 (which began Sept. 28), despite the longer-range economic headwinds that this global crisis will leave in its wake.
A marijuana cash cow
Marijuana stocks and dividends don't generally go together, but Innovative Industrial Properties is an exception. While most pot companies are unprofitable growers, IIP is a real estate investment trust, and in return for the advantages that corporate structure brings, it has to pay out at least 90% of its profits as dividends.
The company is the leader in its niche, providing real estate to the marijuana industry. And by purchasing grow facilities and leasing them back to their previous owners, it provides those cannabis companies with access to capital as well.
With a focus on clients that grow cannabis for the medical-use market, the company owned 63 properties across multiple states as of its most recent earnings report. Innovative Industrial Properties is growing quickly. It's revenue tripled year-over-year in its most recent quarter to $34.3 million, and as a landlord, generates stable cash flow, a rarity in an industry that operates at the whims of commodity pricing and heavy regulation. Net income in its third quarter also tripled, reaching $19.2 million, showing its business generates excellent profit margins.
The marijuana industry has been transformed in the last decade, starting with the legalization of recreational weed in Colorado and Washington in 2014. Four more states just voted to approve recreational cannabis use this month, bringing the total number that have done so to 15. President-elect Joe Biden has also called for the decriminalization of marijuana, which should add to the regulatory tailwinds for the industry. Innovative Industrial Properties has the opportunity to get into the potentially much-bigger recreational side of the business as laws change.
The stock today offers a dividend that yields 3.1%, and its share price has doubled this year. As a unique dividend stock in a high-growth industry, Innovative Industrial Properties looks like an appealing choice for retirees and others looking for growth and income.