Dividend stocks are tried and true wealth creators. Dividend payers in the S&P 500 have vastly outperformed their non-paying peers over the past 50 years, with a 9.2% average annual total return, compared with a negative-0.6%, according to data from Ned Davis Research and Hartford Funds. Meanwhile, companies that have grown their dividends have performed even better, with a 10.2% average annual total return.
Rexford Industrial Realty (REXR 0.47%), Capital One Financial (COF 0.16%), and Realty Income (O -0.17%) have magnificent track records of paying dividends. That's one of the features that made them stand out to a few Fool.com contributors. Here's why they think these dividend stocks can enrich their investors by the end of the decade.
Quietly dominating this one market
Tyler Crowe (Rexford Industrial Realty): In a world where the cost of capital is higher and investments outside of stocks are generating more attractive yields, a dividend stock with a lower yield really needs to blow me away with structural business advantages and significant dividend growth potential.
There aren't a lot of candidates that meet this criteria, but Rexford Industrial Realty is one of them. Rexford owns and leases industrial properties in the Los Angeles-Orange County-San Diego megalopolis. It sounds like a niche player, but the total square footage of industrial-zoned property in this region is larger than all of Germany's industrial-zoned property.
Real estate is a tough business right now. Refinancing debt at higher interest rates is a real risk. Rexford should be able to mitigate this better than most. For one, the market in which it operates is shrinking. A total of 125 million square feet of industrial zoned properties has been rezoned for other purposes since 2001, putting industrial property in the region at a premium. Southern California routinely has some of the lowest vacancy rates and highest rent per square foot for industrial property in the United States.
These strong market fundamentals should lead to continued rent increases and, in turn, higher dividend payments. So far, the company has increased its payout 17% annually for the past five years. At a 3.4% yield today, that's the profile of a dividend-growing stock I would want to bet on today.
Banking on being a contrarian
Jason Hall (Capital One): Most bank stocks are down a lot in 2023, which is unsurprising with a spate of big, public bank implosions that wiped out billions of dollars of shareholder wealth. With ongoing concerns about inflation, the economy, and consumer spending power, those worries have carried over to Capital One Financial, perhaps best known for its popular credit cards they heavily market with a spate of famous personalities.
Yet concerns about its large book of subprime credit card customers has weighed on the stock, down about half from its multiyear high. As a result of this big decline, shares now trade for a stunningly cheap 63% of book value. That makes it one of the cheapest large U.S. banks by book value, along with Truist Financial, which also has a pretty large book of commercial real estate and low-yield mortgage investments.
So what makes Capital One a dividend-paying bank worth making a contrarian investment in? In short, it's about the risk and reward. The biggest risk that it faces would be a recession. With its large book of credit card debt, it stands at the vanguard of credit risk. Credit cards are some of the first things people pay late -- or default on -- during hard times. And unlike a home or auto loan, there's not an asset to repossess to cover credit losses.
That risk is real in the near term. And it could even, in a worst-case scenario, result in a dividend cut. But looking out five-plus years, I see significant opportunity here for patient investors to buy a high-quality bank at a deeply discounted price. I expect this price will look like bank robbery in 2030.
Growing wealth one dividend at a time
Matt DiLallo (Realty Income): Realty Income has a phenomenal track record of success. The REIT has paid 640 consecutive monthly dividends throughout its history. Even better, it has increased its payment 122 times since its public market listing in 1994, including for the last 104 straight quarters. Overall, it has grown its dividend at a 4.2% compound annual rate. The main factor driving this growth has been acquiring additional income-producing real estate.
That steadily rising dividend has made investors richer over the years. For example, a roughly $4,000 investment at the end of 2012, enough to buy 100 shares, would have grown into nearly $6,000 over the past decade. On top of that, investors would have earned more than $2,900 in dividend income.
Realty Income is in an excellent position to continue enriching its investors in the future. The company has one of the best balance sheets in the REIT sector, giving it ample financial flexibility to continue acquiring income-producing real estate. Meanwhile, it has a massive investable universe. Realty Income estimates that there's over $12 trillion of commercial real estate across the U.S. and Europe suited for net leases, giving it a significant growth runway.
The company has steadily expanded its growth prospects by adding new property verticals. Over the past two years, it has made its first acquisitions in Italy and Ireland. It has also added gaming, vertical farming, and consumer-centric medical properties. On top of that, it recently launched its credit investment platform. Adding new avenues of growth will enhance Realty Income's ability to expand its portfolio in the future.
Realty Income has the financial flexibility and opportunity set to continue growing its portfolio and dividend in the future. That steadily rising payout should enable the REIT to make its investors even richer by the end of the decade.
