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2 Stocks to Buy With Dividends Yielding More than 4%

By David Jagielski - Mar 25, 2021 at 6:40AM

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A stable business that pays a sustainable dividend can make for the ideal buy-and-hold investment.

When considering which dividend stocks to invest in, it's okay to be a little greedy and look for companies with a high dividend yield. While you probably don't want to be targeting excessively high yields, many stocks that pay more than 4% per year are still great options. Not only do they pay significantly more than the 1.5% you will earn with the average stock on the S&P 500, but they can also be sustainable over the long run (depending, of course, on the company's financial strength).

Two stocks that currently pay more than 4% per year in dividends that you should consider buying are CareTrust REIT (CTRE 0.93%) and Kraft Heinz (KHC 0.32%). Both sport strong financials and showed steadfast business performance amid the pandemic, making it easy to understand why the stocks have been outperforming the markets.

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1. CareTrust REIT

CareTrust currently pays a dividend of $0.265, which yields 4.5% on an annual basis. So if you were to invest $10,000 in the stock, you could expect to collect around $112.50 every three months if the dividend payments remained intact. And there is a good chance those payments will increase over time. Since CareTrust is a real estate investment trust (REIT), it needs to pay out at least 90% of its earnings out to shareholders. That means if profits rise, its dividend payments will rise too. The company mostly recently raised its quarterly dividend payments by 6%.

The REIT focuses on healthcare, and its portfolio is primarily made up of skilled nursing facilities (which offer short-term care) and assisted living locations. CareTrust proved to be a rock-solid investment in 2020 as its total revenue of $178.3 million grew at a rate of 9.1% year over year. Its per-share profits of $0.85 were nearly double the $0.49 that CareTrust reported in 2019.

For dividend investors, the key number to focus on is funds from operations (FFO), which is the equivalent of net income for REITs. And for last year, the company's FFO per share was $1.40. That is well above the $1.06 that it is currently paying out based on its most recent dividend and calculates out to a payout ratio of 75.7%. If you were to use the company's per-share profits in calculating the payout ratio you might think the dividend is in trouble since the dividend would be more than 100% of earnings. That is why FFO, which excludes depreciation and gains or losses that can have a big impact on net income, can be more helpful in assessing REITs.

Over the past 12 months, CareTrust's stock has risen an incredible 73%, just outperforming the S&P 500 and its 71% gains during that time frame. CareTrust collected 99.3% of contracted rents last year and did remarkably well despite the COVID-19 pandemic. Combine that with a dividend that is not just safe but also rising in value and you have a great potential investment here that can generate stable, recurring income for years to come.

2. Kraft Heinz

Kraft Heinz is another dividend stock that has been outperforming the S&P 500 over the past year, rising by 83% in value. The company known for its ketchup and other food products did just fine in 2020, as consumers have been staying home and eating in more. Last year, net sales of $26.2 billion rose by 4.8% from 2019. Although investors may be concerned about the significant fall in net income -- $356 million in 2020 versus $1.9 billion in the prior year -- that was largely due to goodwill impairment losses of $2.3 billion. The non-cash item drained Kraft's profits, but for income investors, that doesn't mean the company is going to have trouble paying its dividend, with per-share profits of $0.29 for the full year coming in well below even Kraft's quarterly payouts of $0.40.

Here again, investors should look past just the company's profitability and use another metric: free cash flow. Last year, Kraft generated $4.3 billion in free cash -- 55.6% higher than the $2.8 billion it brought in the year before. Free cash is what the company has generated from its day-to-day operating activities after accounting for any capital expenditures. And during the past 12 months, the company's dividend payments totaled just under $2 billion -- which is not even half of the free cash it generated in 2020. Kraft hasn't raised its payouts in recent years but with a yield of just over 4% right now, it still offers investors a top payout that looks very sustainable.

The company isn't expecting any incredible growth numbers for 2021, but it is projecting that for the first quarter of 2021 (the period ends in March) it will generate flat to positive organic sales growth. The company simply needs to remain stable for the dividend to continue and that looks to be a safe bet right now. With a great yield and a household name, Kraft is one of the better options out there for income investors today.

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Stocks Mentioned

CareTrust REIT, Inc. Stock Quote
CareTrust REIT, Inc.
$17.32 (0.93%) $0.16
Kraft Heinz Intermediate Corporation II Stock Quote
Kraft Heinz Intermediate Corporation II
$44.43 (0.32%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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