Don't let yourself get stuck looking only at growth stocks if you are looking to build long-term wealth. Dividend stocks can play an important role in your portfolio, too. Hormel Foods (HRL -0.27%) and Realty Income (O -0.33%) show exactly why this is true -- and they both may be worth buying.
Historically cheap
Food maker Hormel sports a dividend yield of around 2.3% today, which is toward the high end of the company's historical yield range. That suggests the stock is relatively cheap right now and possibly worth buying for long-term income investors. That's true even though 2.3% isn't exactly an awe-inspiring yield on an absolute basis. The reason boils down to dividend growth.
Over the past decade, Hormel's collection of iconic food brands has allowed it to increase its dividend at an annualized clip of about 13%. The value of the quarterly dividend has increased by roughly 240% over that span. That's a huge amount of dividend growth. But here's the interesting thing: Stocks tend to trade in yield ranges. So the yield, while historically high today, has been fairly consistent over time. The way that happens is the stock increases along with the dividend. The stock price is up about 220% during the past decade. For reference, the S&P 500 Index is up about 180% during that same span.
It's also worth noting that Hormel is a highly elite Dividend King, with over 50 years of annual dividend increases under its belt. So the past decade of dividend hikes is not an outlier event -- it's pretty much the norm. If you are looking to create a richer retirement, Hormel is a name to consider right now.
The power of dividend reinvestment
Above, the comparison to the S&P 500 was based simply on price change. Real magic can happen when you reinvest dividends, and giant real estate investment trust (REIT) Realty Income is a great example of this. Over the past 20 years, the S&P 500's gain has been about 345% compared to roughly 310% for Realty Income shares. However, Realty Income has a long and impressive history of paying dividends (it is a Dividend Aristocrat).
If you had reinvested all of the dividends, Realty Income's total return (which captures reinvested dividends) would have been a huge 1,100% compared to the S&P 500 index's 550% or so. That's the power of dividend reinvestment on clear display. And suddenly this REIT and its roughly 4.4% yield starts to look a lot more attractive even though the average historical dividend hike here has been a modest 4% or so.
Realty Income also happens to be one of the largest net lease REITs, meaning it owns properties but its tenants pay most of the property level operating costs. Indeed, with over 11,000 properties, a $40 billion market cap, and an investment-grade-rated balance sheet, this REIT has the size and scale to take on deals that its peers couldn't even attempt. There's no reason to expect it to cede its crown as the industry giant, which means bigger and ever better is the likely trajectory here. Although the stock isn't exactly cheap today, it is usually afforded a premium valuation. This industry leader is probably worth the price of admission for long-term investors.
Don't ignore dividends
Hormel shows how rapid dividend growth can lead to rapid stock price appreciation. Realty Income shows what slow and steady dividend growth, combined with dividend reinvestment, can make happen. If you are trying to build a richer retirement, don't ignore dividends in favor of growth stocks. And, if you take the time for a deep dive, both Hormel and Realty Income could find a place in your portfolio today.