The data on dividend stocks makes a clear case. Over the past 50 years, dividend payers in the S&P 500 have outperformed non-dividend payers by more than 2-to-1, with a 9.2% average annual return compared to 4.3%, according to data from Ned Davis Research and Hartford Funds. However, within that group, there is a wide variation, as dividend growers have significantly outperformed both companies with no change in their dividends and those that have cut or eliminated their payouts, at 10.2%, 6.8%, and negative-0.9%, respectively.
Given that dataset, the smartest dividend stocks to buy are those that routinely increase their dividends. Two top options for those with $1,000 to invest right now are Realty Income (O 0.67%) and Brookfield Infrastructure (BIPC 1.48%) (BIP 0.90%). They offer higher dividend yields and an excellent record of growing their dividends, which seems highly likely to continue.
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An extremely consistent dividend growth stock
Realty Income has been a dividend growth juggernaut over the years. The real estate investment trust (REIT) has raised its monthly dividend payment 130 times since its public market listing in 1994. It has increased its payment for 110 straight quarters and 30 years in a row. The company has grown its payout at a 4.3% compound annual rate, which has helped support a 13.6% compound annual total return since its listing.
The landlord currently has a 5.7% dividend yield. The REIT would generate $57 of annual dividend income from every $1,000 invested in its stock at that rate. It backs that payout with a high-quality portfolio and financial profile. The REIT owns a diversified portfolio of over 15,600 properties, including retail, industrial, and gaming, among others, across the U.S. and several European countries. It secures these properties with long-term net leases with many of the world's leading companies. Net leases provide it with very stable rental income because tenants cover all property operating expenses, including routine maintenance, real estate taxes, and building insurance.
Meanwhile, it has a conservative dividend payout ratio of around 75% of its adjusted funds from operations (FFO). That gives it a nice cushion while enabling it to retain significant excess free cash flow each year to help fund new real estate investments. Realty Income also has one of the strongest balance sheets in the REIT sector, giving it additional financial flexibility to buy more income-generating properties. With an estimated $14 trillion in commercial real estate suitable for the net lease structure across the U.S. and Europe, Realty Income has a long growth runway.
High income and growth potential
Brookfield Infrastructure has done a terrific job growing its dividend over the years. The global infrastructure operator has increased its payout for 16 straight years, every year since its formation. It has delivered dividend growth within or above its 5% to 9% annual target range during that period. That steadily rising payout has helped fuel an average annual total return of 13.5% since Brookfield's launch.
The diversified infrastructure company currently yields 4.4%. That high-yielding payout is on a sustainable foundation. About 85% of the company's FFO comes from contracted or regulated frameworks that provide it with stable cash flow. Most of its FFO is indexed to inflation or protected from the impact of inflation. Meanwhile, the company pays out a conservative 60% to 70% of its stable cash flow in dividends. Brookfield also has a strong investment-grade balance sheet.
Brookfield's strong financial profile gives it the flexibility to invest in expanding its operations. The company has nearly $8 billion in capital projects in its backlog that it expects to complete over the next two to three years, including two U.S. semiconductor facilities and several data center projects around the world. The company will also acquire infrastructure platforms that produce stable income. For example, it recently agreed to invest $500 million into the acquisition of a major U.S. refined products pipeline system. Brookfield expects its investments to help drive double-digit annual FFO per share growth over the long term.
Wise choices for income and upside potential
Realty Income and Brookfield Infrastructure have been model dividend stocks over the years. They have steadily increased their higher-yielding payouts, which have helped support their strong total returns. With more dividend growth likely, they look like smart dividend stocks to buy right now.
