One of the best things about being a long-term investor is the satisfaction you can feel when the market is plunging. Rather than stress and panic, the longer-term mindset allows you to see opportunity.
The rewards that can come from taking advantage of those opportunities are twofold: Buying when a stock is down can lead to appreciation of the invested capital, of course. But maybe an even bigger benefit is being able to create a lifelong income stream from a nice dividend yield on that investment. Now is one of those times when some high-quality dividend stocks are down, and investors can potentially lock in historically high returns for life.
Create a personal annuity
Some people work to grow investments over years and decades and then hand over a lump sum to purchase an annuity. That ensures income for life, but why not spend those many years instead of building your own version of an annuity? With some quality dividend-paying stocks down this year, now's the time to create a plan that will end up supplying a meaningful stream of income in the future.
The following stocks are down between 2.5% and 17% year to date, while the S&P 500 index has gained about 17%:
- Real Estate Investment Trust (REIT) Realty Income (O -0.17%).
- Home improvement retailer Home Depot (HD 0.94%).
- Discount retailer Target (TGT 0.18%).
These stocks are down for different reasons. Realty Income had dropped from fears of a recession and then declined further when it made a large acquisition. Home Depot faces headwinds from rising interest rates that affect its businesses in different ways. Home Depot has been through difficult market environments in the past. It is a good example of how one could have effectively built a personal annuity by buying the stock 20 years ago. Home Depot shares have risen by 700% over the last two decades. But its quarterly dividend has grown by nearly 2,900%.
The result of that dividend growth is the annual yield I receive, based on my initial investment in Home Depot made about 20 years ago, has risen to over 40%. That can add up to a significant income stream even from a moderate initial investment.
Magic of time
By thinking and planning for far into the future, the magic of time and a growing dividend will pay off. But for that dividend growth to happen, the company must execute a successful business strategy, increase sales and earnings, and be willing to return profits to shareholders. That's why it's also important to look at why stock prices of these companies have fallen this year, and what could help the companies recover from recent headwinds.
As mentioned, Realty Income stock plunged last month when it announced an all-stock transaction valued at about $9.3 billion to purchase fellow real estate investment trust (REIT) Spirit Realty Capital. That often happens to the acquirer's stock. But the deal expands its mix of tenants, and Spirit also brings more geographical diversity to Realty Income's properties.
Investors have punished Home Depot because of rising interest rates this year. That's slowed the housing market and has impacted consumers that might borrow money for home improvements.
Target has had problems related to inventory missteps and theft. But management still raised the dividend by about 2% this year after a massive 20% increase last year. That will make 2023 the 52nd straight year that Target has increased its annual dividend.
Mailbox money
Those interest rate headwinds will eventually abate, and retailers Home Depot and Target both have a long history of successful execution. It would be wise not to let the current opportunity to buy a diverse set of dividend-growth stocks pass you by.
As interest rates normalize, Home Depot should see a pivot in its business along with the housing market. Realty Income will also have access to lower-cost capital and can continue to grow as it has done with its recent acquisition. Target's recently released third-quarter report shows that it is already turning the corner from recent setbacks. Earnings beat expectations as the company increased operating margin. That came from management focusing on reducing inventories, implementing new practices to reduce theft, and managing expenses. Investors reacted by pushing the stock sharply higher.
All of those factors bode well for the future of these underlying businesses. That means historical dividend practices can continue offering a future income stream to shareholders.
The late, great singer, songwriter, and storyteller Jimmy Buffett once wrote about the flow of royalties from his prolific song catalogue, singing "mailbox money, sure been good to me." That's how you can feel in a decade or two if you load up on quality dividend-paying companies today.
