Despite the recent increase in long-term interest rates in the U.S., finding yield is still a struggle for many income investors. But it's easier if you know which sectors give you the best opportunities.
Real estate investment trusts (REITs) are a classic hunting ground for income investors, as are utilities. These two sectors are generally known for companies with stable business models that throw off lots of cash. Coca-Cola, which pays a respectable 3.3% dividend yield at Thursday's prices, is a longtime favorite of dividend investors for its stability and its commitment to quarterly payouts, but here are three stocks that offer benefits of their own with higher yields.
A great yield and a potential catalyst to unlock value
Mortgage originators had a year for the ages in 2020 as the Fed cut rates to the floor and bought mortgage-backed securities in order to support the economy. But New Residential (NYSE:NRZ) makes loans that fall outside government guidelines and are therefore not guaranteed by the U.S. government. These loans are called non-qualified (non-QM) loans. While these loans can be riskier, they also pay a lot more than the typical plain-vanilla mortgage loan guaranteed by the U.S. government (New Residential also originates these plain-vanilla loans).
New Residential, a diversified mortgage REIT, filed a confidential prospectus with the Securities and Exchange Commission last year to possibly spin off the mortgage origination operation, which it believes is being undervalued by the market. So investors might have a catalyst to unlock value someday, although the plan's status is uncertain for now. Until then, New Residential pays a handsome dividend of 7.5% at Thursday's prices.
A green energy boost from the new administration could bolster Duke's bottom line
Utilities have historically been a go-to income stock. Regulated utilities have an interesting business relationship. In exchange for being granted a monopoly market, they agree to let the state determine how much they are permitted to charge. The state regulators don't want to see the utility engage in price gouging; however, they also don't want to put the company in financial danger. This leads to an extremely stable environment for the company and a predictable dividend stream for the investor.
One of the top utilities out there is Duke Energy (NYSE:DUK), which provides regulated electric and gas service to the Southeast and Midwest. The Biden administration is expected to increase subsidies for renewable energy, and the company pays a 4.3% dividend yield.
An end to the COVID-19 crisis will help Realty Income's tenants
A discussion of dividend stocks wouldn't be complete without mentioning a Dividend Aristocrat. While most REITs struggled last year as COVID-19 shutdowns affected many of their tenants, some performed better than others. Realty Income (NYSE:O) is one of the few REITs that actually increased their dividends last year, while many REITs cut or suspended theirs.
Realty Income is a triple-net lease retail REIT, which means the tenants are responsible for taxes, insurance, and maintenance. The leases are generally long-term (over 10 years), and the tenants have business models that are largely insulated from economic downturns. Tenants like drug stores, dollar stores, and grocery stores have been considered essential businesses during the COVID-19 crisis, and their non-discretionary nature makes them extremely reliable. As more people get the COVID-19 vaccine, some of Realty Income's more service-oriented tenants like movie theaters and child care should reopen, which will improve earnings. Realty Income pays a monthly dividend and yields 4.7%.
While finding income in this environment can be difficult, it isn't impossible, provided investors know where to look. Real estate investment trusts and utilities are the classic sectors favored by income investors. Energy master limited partnerships are another fertile area to explore. These companies should be considered relatively stable investments, although New Residential will probably be the most volatile of the group, while Duke would be the least.