With interest rates still at historically low levels, finding yield in this environment is difficult, and often requires taking big risks. That said, not all decent dividend payers are risky; in fact some of them are quite conservative.
Here are three interesting dividend plays. One is the steady performer that has worked throughout the entire economic cycle. Another is a play on rising demand for mobile data, which will last for years and years. The final one is an inflation trade.
Realty Income is the steady performing Dividend Aristocrat
Realty Income (O -1.52%) is one of the classic Dividend Aristocrats, which is an elite group of dividend payers that have a long history of annual dividend hikes. Realty Income develops single-tenant properties under a triple-net lease arrangement, which pushes most of the costs such as taxes and insurance onto the tenant. These leases are generally long-term and have automatic rent escalators.
Most real estate investment trusts (REITs) struggled during the COVID-19 pandemic as many businesses were shut down, leaving tenants unable to come up with the rent. Most of Realty Income's tenants were considered "essential businesses" and permitted to remain open. The typical Realty Income tenant is a drug store, convenience store, or dollar store. These businesses are also highly defensive in that consumers will still buy medications and snacks no matter what the economy does.
When many REITs cut their dividends in 2020, Realty Income raised its dividend three times. At current levels, it pays a yield of 4.1%. Realty Income has been such a steady player with a solid business model, it should be a core holding of an income investor's portfolio.
American Tower is a long-term growth story with an interesting record
American Tower (AMT -2.03%) is a cellphone tower REIT and another consistent dividend payer. American Tower erects towers for mobile phone and other signals and then leases capacity on these towers to the big telecom companies, cable companies, and governments. These leases are generally long-term, and there are massive barriers to entry. The zoning restrictions for building new towers are difficult to meet, and most of the best locations are already occupied.
The demand for mobile data keeps increasing as phones become more sophisticated. According to some studies, demand for mobile data is expected to grow by 29% a year for the next six years. The rollout of 5G will be a long-term growth story for cellphone data and tower usage.
American Tower doesn't have the highest yield out there, because it is reinvesting capital into the business. At current levels, it has a dividend yield of about 2.1%; however, American Tower has a track record of raising its dividend every quarter since April 2012. That is an incredible track record of dividend hikes.
Weyerhaeuser is a bet on inflation
Weyerhaeuser (WY -0.07%) is a REIT that owns and manages timberland in the U.S. and Canada. Lumber prices benefited from shortages during the COVID-19 pandemic, and prices are still high, although they have fallen a bit this year. For a company like Weyerhaeuser, inflation is a benefit because its costs don't necessarily move in lockstep with lumber prices.
Weyerhaeuser has an unusual dividend structure. It pays a normal quarterly dividend that is meant to be sustainable throughout the entire price cycle of lumber. During expansions and when inflation is running hot, profits will be high, and during recessions, prices will fall and profits will weaken. To ensure that shareholders are rewarded during the good times, Weyerhaeuser pays an annual supplemental dividend and the occasional special dividend.
Last year, Weyerhaeuser paid a quarterly dividend of $0.17 per share, a special dividend of $0.50 and it just paid a supplemental dividend of $1.45 (which was paid in February based on 2021 earnings). All told, Weyerhaeuser paid $2.63 in dividends, which works out to about a 6.6% dividend yield, at current prices. Given that inflation looks to be around for a while, Weyerhaeuser should be another good dividend payer.