If history is our guide, the best thing an investor can do with his cash is to buy dividend stocks. Numerous studies prove that over long periods of time, dividend stocks perform better than non-paying stocks by a wide margin.
Several years ago, J.P. Morgan Asset Management found that stocks that initiated and then raised their payouts over a 40-year period between 1972 and 2012 returned an average of 9.5% annually, vs. just 1.6% non-dividend-paying stocks. Over rolling three-year periods, the higher-yielding securities beat the low- and non-dividend-yielding securities about two-thirds of the time.
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The asset managers at Hartford Funds similarly found that beginning all the way back in 1930, dividend-paying stocks contributed 41% to the total return of the benchmark S&P 500. Even during the so-called "lost decade" of the 2000s, when the tech stock bubble burst, the 9/11 tragedy struck, and the housing market crashed -- resulting in the negative returns on the S&P 500 -- dividend stocks gained 1.8%.
Dividends can also be reinvested into more shares of dividend-paying stocks, whether through a dividend reinvestment plan (DRIP) or just buying more shares of other income-generating businesses. By reinvesting your payouts, you'll wind up with a growing number of shares, and therefore even larger future payouts that will help rapidly compound your wealth.
With that as our strategy, here are a pair of high-yield dividend stocks to consider investing in right now.
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1. AT&T
Let's get it out of the way right away that Ma Bell isn't going to be a Dividend Aristocrat for much longer. As soon as AT&T (T -1.21%) spins off its WarnerMedia properties to merge them with Discovery (DISCA) (DISCK) and create a new publicly traded media company, its dividend payout will be slashed by approximately half.
For many income investors, AT&T is still a widows-and-orphans stock that has reliably made and increased its dividend for over 25 years, but that's going to come to an end as it cuts the amount of money it devotes to the payout. Still, all is not lost.
It was because of AT&T's 2018 acquisition of Time Warner that it found itself in a predicament, saddled with exorbitant amounts of debt and no real focus. Shedding its media assets will allow the telecom to narrowly focus once more on what's important, which is the rollout and expansion of its 5G network infrastructure. It began preparing for the separation earlier this year by acquiring significant amounts of 5G mid-band spectrum assets. It also continues to roll out its 5G-C and fiber network access to ever-larger segments of the country.
AT&T will be able to invest in its business because it anticipates netting about $43 billion from the spinoff transaction, much of which will go toward paying down its debt load. It will also invest in enhancing the performance of its network.
The telecom's dividend currently yields about 8.4% annually, which even when halved will still yield over 4%. That's a rich payout by most standards and well above the average of 1.2% that the S&P 500 yields today. Moreover, those media assets may one day pay a dividend of their own, and since AT&T investors will continue to own a portion of them after the spinoff, they could eventually make up for what they've lost.
Further, Wall Street is forecasting AT&T's dividend will grow again, eventually exceeding its current payment by the middle of the decade. These reassuring actions make Ma Bell's high-yielding tech stock one to buy and hold today.
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2. Digital Realty
Real estate investment trust (REIT) Digital Realty (DLR -0.71%) is an unusual choice for a high-yield tech stock because REITs are usually seen as financial stocks, not technology picks. However, because Digital Realty owns and operates warehouses full of servers and data centers, it neatly straddles both worlds.
Data center REITs are also becoming a rare commodity these days because of the merger and acquisition boom in the space. Assuming all the deals that have been announced are completed, Digital Realty and Equinix (EQIX 0.90%) will be the last two remaining REITs in the space. With market valuations of $50 billion and $75 billion, respectively, it's unlikely anyone will be acquiring them or taking them private.
Digital Realty owns 282 data centers that represent 35 million square feet of space, including 36 data centers held as investments in unconsolidated joint ventures (Equinix owns 235 data centers).
Data centers essentially serve as the backbone of the internet, providing the nerve center for everything that occurs in the cloud and online, whether it's e-commerce or Internet of Things devices accessing their network. All of that data needs a home in which to live, and data centers provide the warehousing for the servers and networking equipment in a secure environment.
However, data centers are no longer simply a bricks-and-mortar presence -- they have moved into the cloud themselves. Digital Realty's PlatformDIGITAL service is a global data center platform that meets the evolving needs of enterprise customers by allowing them to customize by the cabinet or to scale and hyperscale for very large deployments. It recently closed on a joint venture with Brookfield Infrastructure Partners (BIP 2.21%) to bring the platform to India, one of the world's biggest, most important data center markets.
Third-quarter adjusted funds from operations (AFFO), a critical profitability metric for REITs, was $1.60 per share, up from $1.47 per share a year ago, and was primarily pushed higher by the expansion of the PlatformDIGITAL service.
Digital Realty's dividend currently yields 2.7% annually, which is not especially high compared to AT&T. It is still a hefty payout for a tech stock, and one that investors should count on growing in the future.
