Contrary to what many income investors think, the best dividend stocks aren't necessarily ones with high yields. High-yield dividend stocks have particularly gained attention in the present low interest rate environment, but many can be value traps in disguise.
There's a method to making real money from high-yield stocks without getting trapped: If you pick dividend yields that are supported by sustainable and regular, even growing, dividends, you should be in good hands. Here are five such dividend stocks yielding between 4.6% and 9.5% that are solid buys today.
A 5.4%-yielding Dividend Aristocrat in the making
W.P. Carey (WPC 0.16%) isn't just one of the largest net-lease real estate investment trusts, but it's also a well-run company. The evidence lies in its dividends: Even in an exceptionally challenging year like 2020 when the COVID-19 pandemic forced industrial establishments, warehouses, offices, and retail stores to shut down for months, W.P. Carey increased its dividend every quarter. The streak is very much alive, with the company increasing its dividend twice so far in 2021, marking its 23rd straight year of dividend increases.
At this pace, W.P. Carey should become a Dividend Aristocrat by early 2023. Here are just some of the reasons why the company can pull off the feat:
- A solid portfolio of 1,266 properties spanning 150 million square feet.
- Diversification across sectors and geographies: 36% assets based in Europe.
- Ninety-nine percent leases with built-in contractual rent increases.
- Weighted average lease term of 10.8 years.
- Ninety-eight percent portfolio occupancy as of the end of the second quarter.
With management planning to invest $1.5 billion to $2 billion this year and already raising its cash-flow forecast, this 5.4%-yielding stock looks really promising.
A 5%-yielding stock to play a pandemic-induced trend
Another high-yield REIT on my radar today is Physicians Realty Trust (DOC), one of the several healthcare REITs that should benefit from an aging population. Unlike REITs focused on properties like senior housing that have seen occupancy dip during the pandemic, medical office facility REITs like Physicians Realty are doing brisk business. Its rental revenue and funds from operations, for example, grew 2% and 3%, respectively, during the first half of 2021, and the company acquired three properties in that time.
Image source: Getty Images.
Physicians Realty acquires on- and off-campus medical office properties and leases them out to healthcare service providers across specialties, including primary care, ambulatory surgery care, cardiology, radiology, and oncology. As of June 30, Physicians Realty had leased out 96% of its 263 health properties in 31 states, with an average remaining lease life of 6.6 years.
The best part is Physicians Realty's triple-net leases, meaning all property-related operating expenses are borne by the tenant. That also means stable and predictable cash flows, which explains Physicians Realty's 32 consecutive quarterly dividends so far. With the pandemic fueling the shift of clinical services from inpatient hospitals to outpatient medical facilities, Physicians Realty is a compelling stock to own.
An 8.1%-yielding stock for the oil market boom
With crude oil prices soaring and energy companies doling out big dividends, some of the best dividend stocks today can be found within the energy sector. Among them, Enterprise Products Partners (EPD -0.31%), with its 8.1% yield, is a top high-yield oil and gas stock to own.
To be sure, Enbridge (ENB 0.20%) is an equally good contender as it's also a midstream play and yields 6.9%, but Enterprise Products Partners is more diversified and can pay out bigger dividends thanks to its master limited partnership structure. Enterprise Products Partners also has a stronger balance sheet, with its average cost of debt declining significantly in the past decade. In fact, the company funded 100% of its capital investments from cash flow from operations in the trailing 12 months.
Enterprise Products Partners has increased dividends every year for 22 consecutive years, and with its large exposure to the cleaner fossil fuel, natural gas, the stock is well positioned to join the clean energy trend and pay reliable dividends for years to come.
A 4.6%-yielding evergreen blue chip dividend stock
Dow Inc. (DOW -0.44%) stock's yield is just short of 5%, but it's a rock-solid dividend stock. Demand for Dow's products is soaring despite the company increasing prices consistently in recent months, reflecting Dow's market power. Yet the stock has lost nearly 14% in value since June, driving its yield up to a solid 4.6%. In July, Dow reported its best-ever quarter in history. Here are some jaw-dropping numbers:
- Sales: up 66% year over year.
- Earnings: $2.51 per share versus a loss of $0.31 in Q2 2020.
- Debt: down by $1.1 billion. No significant debt maturing before late 2025.
- Free cash flow: $1.7 billion.
That exemplary set of numbers and Dow's financial fortitude is an incredible combination to have in a company that's already the world leader in important chemicals like polyurethanes. The momentum in its earnings and cash flows is here to stay as activity in key end markets like manufacturing, construction, automotive, and personal care pick up. Dow is a cash machine and hasn't missed a single dividend payment since 1912 -- that's 109 years and counting. You won't regret owning this blue chip stock.
A 9.5% yield, with a big dividend coming in September
Rio Tinto (RIO -0.83%) is the most offbeat stock on my list today as it's a pure-play cyclical commodities stock with fluctuating dividends, but the company has displayed remarkable commitment to shareholders in recent years. And with the stock dropping nearly 21% in the past three months, you can take home a mind-boggling yield of 9.5% today.
With prices of base metals like iron ore, aluminum, and copper soaring, Rio Tinto's sales and earnings flew high in the first half of 2021. Of the $12.2 billion it earned and $10.2 billion in free cash flow it generated during the period, Rio Tinto is paying out $9.1 billion in dividends alone, in the form of an ordinary dividend of $3.76 per share and a special dividend of $1.85 per share, both to be paid out in September.
Of course, these are exceptional times and you shouldn't expect such big dividend checks all the time, but here's the thing: Dividends rank second on Rio Tinto's capital allocation priority list after sustaining capital expenditure, and it consistently returns 40% to 60% of earnings in dividends in any given year. Rio Tinto is also getting into lithium mining, and with its earnings and cash flows expected to remain strong in the near future, 2021 should be a record year in terms of shareholder returns.
Make money the smart way
Although stocks like Rio Tinto are temporarily offering such a sky-high yield, it's a consistent dividend-paying company like the other four stocks. That regularity in dividends matters in the long run. And if you top up your portfolio with some solid dividend growth stocks alongside such high-yield stocks, you'll be making money the smartest way.
