It's good to have a healthy dose of skepticism, especially today on April Fools' Day. If something seems to be too good to be true, it might be a trap trying to get you to fall for a joke.
There are a lot of traps in investing. Dividend yield traps are a common one that investors can fall for. You see a high dividend yield on a stock and believe you can make a lot of passive income. More often than not, the joke is on you as the company cuts its payout, and you lose money.
However, some big-time dividends are no joke. Realty Income (O +0.49%), Brookfield Renewable (BEPC 1.33%)(BEP 0.90%), and Verizon (VZ 0.17%) all currently pay dividends yielding more than 5%, putting them several times higher than the S&P 500's (^GSPC 1.52%) 1.3% yield. All three companies have excellent records of increasing their high-yielding payouts, which seems likely to continue. Because of that, you can confidently buy these dividend stocks without the fear of eventually looking like a fool for falling for a trap.
A sparkling record
NYSE: O
Key Data Points
Realty Income is about as consistent a dividend stock as you'll find. The real estate investment trust (REIT) has increased its dividend payment 130 times since going public in 1994. It has hiked the payout every single year for three decades and the last 110 quarters in a row, growing it at a solid 4.3% compound annual rate over the past 30 years.
The REIT's ultra-high-yielding dividend (5.6% current yield) is on a very sustainable foundation. Realty Income generates very steady rental income. It owns a diversified portfolio of properties secured by long-term net leases with many of the world's leading companies. That lease structure requires that tenants cover all operating expenses, including routine maintenance, real estate taxes, and building insurance.
Meanwhile, Realty Income pays out less than 75% of its stable cash flow in dividends. That gives it a big cushion while allowing it to retain lots of money to fund new income-generating real estate investments. It also has one of the strongest balance sheets in the REIT sector, giving it lots of financial flexibility to make new investments. With trillions of dollars in real estate suitable for net leases, Realty Income has lots of room to continue growing its portfolio and dividend payment.
Plenty of power to continue pushing the payout higher
NYSE: BEPC
Key Data Points
Brookfield Renewable has increased its high-yielding dividend (5.4% current yield) by at least 5% annually since its public market listing in 2011. The leading global renewable energy producer generates very stable cash flow by selling the electricity it produces under long-term, fixed-rate power purchase agreements. Most of those contracts link rates to inflation, driving steady income growth.
Meanwhile, power rates have been rising faster than inflation, which will likely continue due to surging demand for electricity. Because of that, it expects to secure higher rates for the power it produces as legacy contracts expire. On top of that, the company is investing heavily in expanding its portfolio by building additional capacity and making acquisitions.
These drivers should grow its funds from operations per share by more than 10% annually over the next five years. That strong growth rate easily supports Brookfield's plan to increase its high-yielding dividend by 5% to 9% per year.
Cashing in on mobile and broadband demand
NYSE: VZ
Key Data Points
Verizon has increased its high-yielding payout (6% current yield) for 18 straight years. That's the longest current growth streak in the U.S. telecom sector.
The telecom giant produces prodigious recurring cash flows as consumers and businesses pay their mobile and broadband bills. Last year, Verizon generated $36.9 billion in cash flow from operations. It used that money to fund the capital expenditures to maintain and grow its business ($17.1 billion) and pay its monster dividend ($11.2 billion). That left it with a whopping $8.6 billion in excess free cash flow, which it used to strengthen its balance sheet.
Verizon is using some of its financial flexibility to acquire Frontier Communications in a $20 billion all-stock deal to bolster its fiber network and enhance its broadband expansion. That deal and its growth capital investments should boost Verizon's cash flow in the future, enabling it to continue increasing its monster dividend.
You'll be laughing all the way to the bank
Realty Income, Brookfield Renewable, and Verizon aren't joking around when it comes to paying dividends. The trio makes lucrative dividend payments, backed by stable cash flows and strong balance sheets. They produce more than enough money to cover their payouts, which enables them to continue growing their businesses.
That growth has allowed these companies to steadily increase their dividend payments, which seems likely to continue. Because of that, investors can confidently buy these dividend stocks, knowing that their payouts are no joke.
