One of the worst things dividend investors can have happen to a stock they own is a dividend cut. There's no perfect way to avoid it. However, you can boost your chances by selecting companies that have long histories of increasing their dividends and strong financial conditions. That's exactly what you'll get with Hormel Foods (HRL 0.14%), Realty Income (O -0.17%), and Enterprise Products Partners (EPD 0.45%) right now. Here's why.
1. Historically high yield
Hormel has a roughly 2.7% yield today. That may not seem all that high to dividend investors, but that yield happens to be toward the high end of the company's historical yield range, suggesting the shares are on the sale rack. The dividend backing that yield, meanwhile, has been increased annually for nearly six decades, making Hormel a Dividend King.
Hormel is facing some troubles today, including customer pushback as it tries to raise prices to offset the hit of inflation on its margins, avian flu's impact on its Jennie-O Turkey business, and the integration of Planters, a recent acquisition that's not going as quickly as investors would like.
However, these are all likely to be temporary issues that, given the company's long history, have been seen and worked through in some form before. Meanwhile, the foodmaker's debt-to-equity ratio is 0.45 or so, which is high for Hormel -- the Planters acquisition is a key factor there -- but not particularly alarming on an absolute basis. The payout ratio is also reasonable at around 60%. If you're looking for a dividend stock that looks historically cheap, Hormel could be the one for you.
2. Big, slow, and reliable
Real estate investment trust (REIT) Realty Income has a roughly 4.9% dividend yield. It has increased the monthly dividend annually for 29 consecutive years and has an investment grade-rated balance sheet. The notable thing about Realty Income, however, is the 12,400 properties it owns, making it, by far, the largest net lease REIT. Net leases require the company's tenants to pay most property-level operating costs.
Having a giant portfolio is a key benefit because Realty Income, with its $40 billion market cap, has scale advantages that its peers lack. Given its size and high credit rating, the REIT can issue debt easily and at attractive prices. Investors also tend to afford it a premium, giving it attractive access to the equity markets as well. That low cost of capital makes it easier to acquire properties to grow the portfolio, with its overall size allowing the company to ink deals that would be too big for its smaller peers to take on alone.
While Realty Income probably won't excite you, it has a long history of reliably rewarding shareholders that looks likely to continue for the foreseeable future.
3. The yield is the story
Midstream master limited partnership (MLP) Enterprise Products Partners has an attractive 7.4% distribution yield. The distribution has increased annually for roughly a quarter of a century. And the MLP has an investment grade-rated balance sheet. Most comforting of all, however, is that the distributable cash flow from its largely fee-based business covered the distribution by 1.9 times in the first quarter. That's a very secure distribution.
But there are a few caveats here. There are some tax complications that investors need to deal with when it comes to MLPs, including having to contend with a K-1 form come April 15. And given the high yield and limited growth opportunities in the pipeline space, the yield is probably going to make up the lion's share of one's return. That's fine if you're looking to maximize the income your portfolio generates, but you need to go in knowing that this is a slow and steady high-yielder, not a dividend investment that will excite you. Owning the vital infrastructure that moves energy around the world is a good business, but it's unlikely to lead to more than low- to mid-single-digit distribution growth over time.
Three stocks to dig into
Hormel is a financially strong, but out of favor, food stock, for those with a value bias. Realty Income is a large and reliable net lease REIT, for investors who want to stick with industry leaders. And Enterprise is a high-yielding MLP with vital infrastructure and a long history of rewarding investors well and, just as important, a well-covered distribution. If you're looking for a dividend stock that you can own for decades, one of these three will probably tickle your fancy.
