For better or worse, dividends have fallen out of favor on Wall Street. Despite record corporate profitability, the flagship S&P 500 index only boasts an average yield of 1.35% as many managers now prefer to return value through buybacks instead of cash. That said, it is still possible to find companies that remain committed to their dividend traditions.
Let's explore why a $10,000 investment in Realty Income (O 0.28%) or Phillip Morris International (PM 0.22%) could be a great source of sustainable income over the long term.
Realty Income
Founded in 1969, Realty Income is a real-estate-investment trust (REIT) specializing in leasing commercial real estate assets and returning most of the profits to shareholders via a consistent dividend. The company has enjoyed an impressive compound annual total return of 13.6% since its public listing in 1994, and it can continue to reward long-term investors because of the quality and diversification of its tenants.
Good tenants are the key to any sustainable real estate business because they mean fewer headaches and more consistent revenue. Realty Income has mastered this side of its business by focusing on stable tenants such as grocery stores, which make up the majority of its rent at 10% -- ahead of convenience stores and dollar stores, which make up 9.5% and 6.5%, respectively. These are reliable, recession-resistant businesses that can usually pay their rent no matter what is happening in the economy.
Realty Income's stock price has fallen around 18% over the last five years because of challenges like rising interest rates, which can reduce demand for income-focused stocks relative to risk-free assets like the 2-year U.S. Treasury, which now yields a whopping 4.83%. But interest rates probably won't stay this high forever.
The dip looks like a buying opportunity because Realty Income's focus on high-quality tenants will help it return to its historical norm of market-beating total returns. Shares boast an annual dividend yield of 5.73%, and the company has managed to grow its payout for 26 years consecutively.
Phillip Morris International
The tobacco industry is a favorite for income-focused investors because of its reliability. Nicotine is a habit-forming product, so its customers tend to keep buying it, even in a challenging economy. Phillip Morris protects its business from regulatory risk through global diversification and a push into alternative tobacco products.
Image source: Getty Images.
Formed in 2007 by a spinoff from its parent company, Altria Group, Phillip Morris was created to maximize shareholder value by separating the company's international business from the frequent lawsuits and regulatory challenges faced by its U.S. operations.
With its focus on a variety of European, Asian, and Latin American markets, Phillip Morris is shielded from political risk in any specific jurisdiction. It further diversifies its business through an ambitious pivot to alternative tobacco products.
As of the first quarter, smoke-free tobacco products represented a whopping 39% of Philip Morris's $8.8 billion in total net revenue. This growth is led by Iqos, a system that releases nicotine by heating instead of burning tobacco. Phillip Morris plans to bring Iqos to the U.S. market, with a broad rollout expected in 2025.
Phillip Morris boasts an impressive dividend with a yield of 5.22%. And the company has steadily increased its payout for 15 years in a row. Management also returns value to investors through occasional share repurchases, including a recent $7 billion buyback program started in 2021. Buybacks can support stock price appreciation by increasing the fundamental value of each share relative to future earnings. So long-term investors have a lot of ways to win with this stock.
