Many investors, especially those looking for income in retirement, seek out companies that pay a dividend when making investment decisions. Although dividends are less common in some high-growth sectors, approximately 84% of the companies in the S&P 500 pay a dividend. While dividends shouldn't be the sole criteria for making a decision on what stocks to buy, companies that have a decent dividend yield can be attractive to those looking for passive income.
The danger in this line of thinking is that some companies have dividends that might be difficult to sustain due to financial weakness. Therefore, investors should be certain to always buy stock in companies that have sturdy foundations. Here are two that fit into that category and would be smart to double up on right now.
A leader in the technology space, Broadcom (AVGO -1.77%) develops semiconductors and software solutions for businesses all over the world. With devices and software that can be found in everything from a home cable box to GPS systems, Broadcom has a wide reach in many growth industries.
In its recently reported Q1 2022 earnings (period ended Jan. 30), Broadcom announced revenue of $7.7 billion, an increase of 16% year over year. Management expects this growth to accelerate, expecting Q2 revenue of $7.9 billion, which would be an increase of 20% over Q2 of 2021. The growth fell to the bottom line as well. Q1 2022 net income was $2.5 billion, up 79% year over year.
Broadcom pays a dividend that currently yields 2.5%, compared to the S&P 500's yield of 1.3%. This dividend is in no danger, as Broadcom regularly generates strong free cash flow ($3.4 billion in Q1) and ended the last quarter with more than $10 billion in cash and cash equivalents on its balance sheet.
Finally, on top of its market-beating dividend yield, Broadcom also bought back $2.7 billion of its shares in Q1, further increasing shareholder value.
2. Realty Income
Realty Income calls itself "The Monthly Dividend Company," and with good reason. Realty is a Dividend Aristocrat, a title bestowed upon companies that have raised their dividend for at least 25 consecutive years. Structured as a real estate investment trust (REIT), Realty is required to pay at least 90% of its taxable income in the form of dividends to shareholders. Realty currently has a dividend yield of 4.1%, easily outpacing the S&P 500.
Realty's regular dividend increases are supported by its impressive business results. Realty ended 2021 with a portfolio of over 11,000 properties in all 50 states, Puerto Rico, the United Kingdom, and Spain. These properties are well diversified, with no single type of property representing more than 9.1% of overall rents. This served Realty well during the pandemic. When its theaters and retail locations were struggling, Realty could count on rent from grocery stores and other essential businesses that remained open.
For full-year 2021, Realty's funds from operations (FFO), a metric commonly used by REITs to measure operating performance, rose to $1.2 billion, an increase of 9% over 2020. Adjusted funds from operations (AFFO), which excludes unique items that are not as meaningful to ongoing operations, increased by 27% to $1.5 billion. Realty also acquired a record $6.4 billion in new properties in 2021, all while its core business boasted an occupancy rate of 98.5%. By contrast, the occupancy rate was 97.9% at the end of 2020. As the economy continues to gain strength, Realty will see fewer of its properties go vacant.
Are these two stocks income buys?
Finding two companies that pay a dividend yield higher than the S&P 500 isn't hard to do. But not all yields are the same, and both of these companies have strong track records and are leaders in their space, increasing the odds that their dividends will be reliable for years to come. For investors looking for dividend income, these companies are worth doubling up on right now and holding for the long term.