Higher-yielding dividend stocks took a hit in 2023. Rising interest rates made lower-risk income investments like bonds and bank CDs more attractive. That weighed on the value of many dividend stocks, pushing their yields higher.
Because of that, investors can lock in some pretty attractive yields heading into 2024. The RMR Group (RMR 1.82%), EPR Properties (EPR -0.32%), and U.S. Bancorp (USB 0.32%) currently stand out to some Fool.com contributors for their enticing payouts. Here's why they believe these dividend stocks look like great buys for income-seeking investors as the new year approaches.
The property manager for publicly traded real estate
Tyler Crowe (The RMR Group): Not all real estate investment trusts (REITs) are the same. I don't mean because they invest in different types of properties. Some have their own management teams and in-house operations, while others are a pile of assets that hires an external manager to take care of day-to-day operations and its investment strategies. For many of those externally managed REITs, The RMR Group is their manager. As of this writing, RMR manages the affairs of five publicly traded REITs as well as several private commercial real estate companies. In total, it manages about 2,000 properties with a total asset value of about $36 billion.
These management agreements tend to be long-term (about 20 years) and carry significant early termination penalties. These contracts give RMR a long-term stream of revenue that remains relatively steady. Also, as the manager of commercial real estate without directly owning it, the company is as close to debt-free as you can get (it has a 6.6% total debt-to-capital ratio).
The company manages some out-of-favor properties like office and retail, and its stock is down 69% since its high in 2018. However, the company is still generating more than enough cash to cover its spending and dividend. That's on top of $268 million in cash on the books (36% of its market capitalization). With its dividend yield at an all-time high of 6.8% and a price-to-earnings ratio of 6.8, this looks like an intriguing, cheap, high-yield stock as we head into 2024.
Finally putting the pandemic in the past
Matt DiLallo (EPR Properties): EPR Properties currently yields more than 7%. That's high, even for the REIT sector (which averages closer to 5%).
EPR Properties' high yield is the result of headwinds it has been battling since the pandemic, which has weighed on its stock. Many of its tenants (especially those in the theater industry) struggled to pay rent due to the impact economic shutdowns had on their operations. The parent company of one of its top tenants went bankrupt, forcing EPR Properties to renegotiate its leases.
However, those headwinds are now in the rearview mirror because demand for experiences has roared back. For example, the theater industry is having a blockbuster year (box office receipts have surged 26% to $7 billion through the third quarter), putting the sector in a better financial position. That has allowed tenants to repay rent that was deferred during the pandemic.
As a result, EPR is enjoying a bounce-back year in 2023. Its adjusted funds from operations (FFO) were up 27% per share during the third quarter due to strong results from its experiential properties and meaningful deferred rent collection. With its rental income normalizing, it's producing more than enough cash to cover its big-time dividend. It generates about $100 million annually in free cash flow after paying dividends.
EPR Properties' excess cash is helping strengthen its already strong balance sheet. At the end of the third quarter, it had $173 million in cash and no borrowings on its $1 billion credit facility. That's giving it the flexibility to expand its portfolio. It currently has $235 million of experiential development and redevelopment projects underway that it expects to fund over the next two years. It can also make acquisitions. These high-return investments have the company set up to continue growing its cash flow.
EPR Properties is heading into 2024 in a strong position. That makes it an excellent option for yield-seeking investors to buy right now.
Banking on a resilient economy
Jason Hall (U.S. Bancorp): 2023 has been either very good or very bad for bank investors. Banks started the year off with a bang, but the March and May failures of three of the biggest U.S. regional banks threatened to cut consumer -- and investor -- confidence in the American banking system. Factor in worries that interest rates surging higher -- freezing the housing market and slowing car sales -- would take a bite out of earnings, and even shares of the safest banks plummeted.
U.S. Bancorp was one of the hardest hit, with shares falling more than 40% from the February peak through the mid-May bottom:
Shares have surged 38% from that bottom, but are still 37% off the all-time high.
Of course, just because a stock's down doesn't mean it's cheap. But I think, if not cheap, then U.S. Bancorp shares are certainly very attractive. At recent prices, shares trade for less than 10 times forward earnings estimates, and less than 12 times trailing earnings. For context, that's far cheaper than the 13.5 times average multiple you'd have paid over the past 10 years. Moreover, its 3.2% dividend yield at recent prices is a good bit higher than it has been historically.
Most importantly, U.S. Bancorp has a very long track record as a responsible lender and banker. With continued worries about a recession, there are near-term concerns. But dividend investors willing to invest for many years to come are likely to be very happy if they buy at these prices and hold.
