Rising interest rates have provided investors with more alternatives to traditional income stocks. Before you make the switch to CDs or bonds, which provide static interest payments, consider reexamining passive income stocks like Realty Income (O +0.74%), Bank of Nova Scotia (BNS +1.01%), and Hannon Armstrong (HASI +0.96%). All three have the potential for dividend growth, and yet rising rates, among other issues, have resulted in share price declines over the past year. Here's why each of these high-yield stocks is worth considering right now.
Realty Income puts dividends first
"The Monthly Dividend Company" is the nickname that real estate investment trust (REIT) Realty Income has trademarked. While this clearly tells you the frequency with which it pays dividends, it also speaks volumes about the company's commitment to rewarding shareholders. To back that up, the dividend has been increased annually for 29 consecutive years at a compound annual rate of 4.4%.
While the REIT won't excite you, slow and steady is hardly a bad thing on the dividend front. Add in a hefty 5.5% dividend yield (the average REIT yields 4.4% and the S&P 500 is at 1.4%), and you have a good reason to dig deeper.
Realty Income is financially strong with an investment grade credit rating. It is the largest company in the net lease niche, with a market cap of nearly $40 billion and a portfolio of over 13,100 properties. (Net leases require tenants to pay for most property-level expenses.) And it has a globally diversified portfolio, with a fairly recent expansion into Europe. Overall, it has a broad platform for growth and can invest in deals that its closest peers couldn't even consider, size-wise or return-wise. Now is a good time to get to know this industry-leading REIT.
NYSE: O
Key Data Points
Scotiabank is focused even further south of the border
Canada has a very conservative banking system that has, effectively, resulted in a small number of very large, entrenched competitors. Bank of Nova Scotia, or Scotiabank, is one of them. That provides a solid underpinning for the company to expand elsewhere. Many of its peers are trying to grow in the U.S. market, but Scotiabank is focused on South America. That involves more risk, but the expectation is for more long-term growth opportunity as the countries in which it operates move up the socioeconomic ladder. The bank's yield is an attractive 6.4%, which is likely a good risk/reward balance.
Just how safe is the dividend? Well, Scotiabank started paying a dividend in 1833. It has paid a dividend continuously since that point. And during the Great Recession, when many of the largest U.S. banks cut their dividends, Scotiabank's dividend was maintained throughout the deep economic downturn. It was hiked again after conservative Canadian regulators lifted their hold on dividend increases.
NYSE: BNS
Key Data Points
To be fair, Scotiabank is not for the faint of heart, given that its growth efforts are focused on a region known for volatility. So you'll need to be prepared to track the stock fairly closely. But if you are willing to put in the extra legwork, this high-yield bank could make a nice addition to your portfolio.
Hannon Armstrong's cash flows are locked in
As a business that resembles a mortgage REIT, Hannon Armstrong's business is all about making loans. It differentiates itself from other mortgage REITs in that its loans are focused on clean energy assets, like solar and wind farms, among other things. It also does other financing like preferred equity and owning land under which a renewable energy project sits.
It has a lofty 6.8% dividend yield. The stock has been buffeted by rising interest rates and a broad decline in the once hot renewable power sector as growth expectations recede.
But there are reasons to be positive. For starters, clean energy is not a flash-in-the-pan investment fad. The world is making a transition from carbon fuels to renewable power. It will take decades to complete and require a lot of money. That's where Hannon Armstrong comes in, since it is a lender to the sector.
The key, and the second point for optimism, is that the Hannon Armstrong focuses on assets backed by long-term contracts. So it has a good read on the future cash flows of the assets on which it is lending, allowing it to lend more responsibly. Those highly predictable cash flows support the dividend. There's a notable change coming in 2024, however, because the company is planning to drop its REIT status. However, it intends to maintain its dividend policy, which has included a dividend hike in each of the past five years.
If you are a dividend investor looking for a relatively conservative way to invest in clean energy, Hannon Armstrong could be a good fit for you. And with the stock down and the yield high, now is a good time to dig into the story.
A hard time to take the plunge
Realty Income, Bank of Nova Scotia, and Hannon Armstrong are all down at a time when the broader market is up. You'll need to have a strong stomach and a bit of a contrarian streak to buy them. But given the lofty yields on offer, you might want to steel your nerves and do some homework on this trio. You're likely to discover that one or more appeal enough to find a home in your portfolio in September.
