Investing in higher-yielding dividend stocks can be a great way to generate passive income. On top of that, many high-yielding dividend stocks also offer compelling upside potential due to a dirt cheap price or built-in growth prospects.
LyondellBasell Industries (LYB 2.46%), Realty Income (O -0.17%), and Bank of N.T. Butterfield & Son (NTB -0.18%) stand out to a few Fool.com contributors for their compelling combination of income and upside. That's why they firmly believe investors won't regret buying shares at their current prices.
Reliable dividends now, some interesting growth later
Tyler Crowe (LyondellBasell Industries): Chemical and plastic manufacturing has, historically, been a good business for long-term-minded investors. It's a cyclical business, and its profitability can swing based on the price of feedstock, typically oil or natural gas. Still, global demand has grown steadily for decades as people around the world move up the socioeconomic ladder and, inevitably, use more plastic and other chemicals.
LyondellBasell has been in the chemical and plastics business for decades. It is the largest manufacturer of polypropylene and polyethylene in Europe, the No. 2 producer of those products in the U.S., and the No. 5 producer of olefins globally.
Two things stand out at LyondellBasell that make it a compelling high-yield investment. For one, its shareholder returns have been spectacular. It has grown its base dividend by 22% annually since 2011 and has paid multiple special dividends and bought back considerable amounts of its own stock.
The other intriguing element to LyondellBasell is its big push into circular plastic production. It has developed several innovative processes for breaking produced plastics back into base chemicals that can then be used for the production of new products. Management estimates its circular plastics will sell for higher prices than base plastics and have lower feedstock costs. Combined, the two should increase margins and profits.
Today, the stock yields about 5.2% with a modest balance sheet and some impressive prospects for growth in the next few years. That looks like a good combination for a reliable and growing dividend for several years to come.
Built-in growth sets this REIT up for a strong 2024
Matt DiLallo (Realty Income): Realty Income has been an extremely reliable dividend payer over the years. The real estate investment trust (REIT) has increased its payout 123 times since its public market listing in 1994, including five times this year. That steady growth should continue, making it a no-brainer for income-seeking investors.
The REIT already has a great head start on its 2024 growth plan. In October, it sealed a deal to buy fellow REIT Spirit Realty for $9.3 billion. The company expects that acquisition to close early next year. It should boost its adjusted funds from operations (FFO) by over 2.5% per share in the coming year. That will put it more than halfway to its target of growing its FFO per share by 4% to 5% per year.
Meanwhile, the combined company expects to produce over $800 million in excess free cash flow after paying its high-yielding dividend (recently around 5.4%). That cash and its elite balance sheet give it ample capital to invest in more income-producing properties. The REIT has been spreading its wings by expanding into new areas. For example, over the past several quarters, it has added data centers, gaming properties, consumer-centric medical facilities, and vertical farming investments to its portfolio. It has also continued its international expansion and added a credit investment platform.
Shares of Realty Income have slumped more than 10% over the past year over concerns about rising interest rates. However, that headwind should fade in 2024, given the expectation that rates will begin to fall. The currently lower share price makes Realty Income look like even more of a no-brainer investment right now. It enables investors to lock in a higher-yielding dividend that should keep rising in the future. That income, along with its earnings growth, puts the REIT in a strong position to produce double-digit annualized total returns from here.
Take it to the bank
Jason Hall (Bank of N.T. Butterfield & Son): 2023 hasn't been a great year for banks. The banking collapses of the spring shook the confidence of many investors, while the ongoing pressures of higher interest rates on balance sheets has affected the bottom lines of a few. But one bank that's built well to profit in the current environment, and a future of rates higher than most have seen in decades, is N.T. Butterfield. Based in Bermuda, Butterfield operates there as well as the Cayman Islands, and the Channel Islands off the coast of the U.K. and Europe. Often considered tax havens, these locations are certainly favored by many of the global elite, and Butterfield has had a presence in these markets for well over a century.
Despite this long presence as a valued bank in its core markets, since its IPO in late 2016, it's been a bit of a middling investment. Shares are up only 31%, while its dividend-included returns are 88%; however, that lags the market by about more than 60 percentage points.
That's partly due to a pretty exuberant IPO debut price, as well as the 2023 banking crisis, but it's also a result of its relatively slow growth profile.
But that doesn't mean investors should avoid it. To the contrary, I think it's an absolute steal. Shares trade for less than 7 times trailing earnings, and the dividend yield is almost 5.5% at recent prices. Even its price-to-book value of just under 2 is cheap for this bank based on its incredible profitability. It has earned 26.5% return on equity over the past year, and a 1.72% return on assets. Compare that to JPMorgan Chase's 18.7% and 1.35%, respectively, and you should see why this is a "back-up-the-armored-truck" sort of bank worth buying.
