One common goal of investors is to build enough gains to fund a prosperous retirement. Meeting that goal sometimes leads to a significant challenge for growth and income investors. The fastest-growing stocks tend to not pay dividends, and stocks with more generous payouts tend to not grow quickly.
I say "tend to" because there are a few exceptions out there. Investors can find dividend growth stocks that also generate enough price appreciation to match or exceed the performance of the S&P 500. Two examples we will discuss today are Broadcom (AVGO 2.99%) and Innovative Industrial Properties (IIP) (IIPR -0.82%). Let's take a closer look at these two stocks that can make you rich in retirement.
1. Broadcom
Broadcom is a business-to-business semiconductor company. It develops customized chips for these enterprises. Products related to storage, wireless, and wired connectivity are among its offerings. It also diversified into enterprise software a few years ago, a factor that could help in shaking off chip demand worries. Assuming it completes its proposed purchase of cloud systems company VMWare (VMW), software will probably account for more than 40% of its revenue.
The company employs engineers near its largest clients to help solve their problems. It also spent $2.5 billion in the first half of fiscal 2022 (which ended May 1) on research and development to develop the needed products for clients. This factor helps give Broadcom a competitive advantage.
Retirees will also like that this business model funds a generous dividend. Its current annual payout of $16.40 per share yields about 3.1% at current prices, nearly double the 1.6% S&P 500 average.
Additionally, the payout has grown rapidly since it paid its first quarterly dividend of $0.07 per share in 2010. And it continues to offer double-digit increases, with the payout rising 14% year over year in 2022 and 11% in 2021. The company generated more than $7.5 billion in free cash flow in the first half of fiscal 2022, which easily covers its $3.7 billion in common and preferred dividend costs and indicates that the increases can continue.
Investors should also pay attention to the stock's performance. The stock price is down more than 20% from its 52-week high. Still, over the last five years, the stock price more than doubled in value, outperforming the S&P 500.
It also now trades at just 23 times earnings, well under chip stocks such as Nvidia (at a price-to-earnings (P/E) ratio of 47) or the software company it plans to buy, VMWare (at 32 times earnings). Hence, its P/E ratio, dividend growth, and rising stock price make Broadcom a stock that retirees should not ignore.
2. Innovative Industrial Properties
IIP is a higher-risk option for building retirement income, but one that deserves a closer look. The real estate investment trust (REIT) leases space to medical cannabis growers.
In one sense, that approach gives it the best of both worlds. First, it is a REIT and not a "marijuana company." Hence, it earns revenue from leasing space and, as a REIT, must distribute at least 90% of its income to shareholders. This guarantee should appeal to retirees looking for passive income.
Not only does it not face Schedule I restrictions, but it also benefits from those regulations. Schedule I rules forbid bank loans and hamper interstate commerce for cannabis companies. IIP can provide financing to marijuana companies through its sale-leaseback program, buying their land to provide them with needed capital and then leasing that space back to its former owner to provide itself with a regular return.
Still, IIP stock suffered in recent months due to concerns about rising risks. A class action lawsuit and high-profile tenant default weighed on the stock. The stock lost around two-thirds of its value since November.
Admittedly, the lawsuit could potentially add significant costs to the company should courts rule against IIP. Also, its non-paying client, Kings Garden, accounted for 8% of its base rents collected. Still, it collected around 99% of its rents in the latest quarter. Fortune Business Insights also forecasts a compound annual growth rate (CAGR) for the industry of 32% through 2026. Such growth could help it find replacement tenants quickly.
It should also be able to cover its dividend. At $7 per share annually, it yields about 7.9%. That payout rose twice over the last year, amounting to a 25% increase. And IIP can likely continue to cover that obligation. It reported $114 million in adjusted funds from operations income, a measure of its free cash flow. That covered the $85 million it paid to common and preferred shareholders.
Finally, the stock's troubles took its P/E ratio to just 19, down from 66 in November. That low valuation and the high-yield dividend may make this a profitable choice for risk-tolerant investors.
