It's rough out there right now if you're a dividend investor. The S&P 500 has a miserly 1.1% dividend yield, which doesn't even come close to the rule of thumb 4% retirement withdrawal rate that investors often use. However, PepsiCo (PEP 0.85%) has a 4% yield, Realty Income (O +0.49%) has a 5.4% yield, and Enterprise Products Partners (EPD 1.64%) has a 6.7% yield. Read on if those yields sound far more attractive to you than 1.1%.
1. PepsiCo is a bit of a turnaround stock
With the lowest yield of the trio, PepsiCo is also the stock that comes with the most uncertainty. It's currently underperforming key consumer staples peers as it faces industry headwinds, including belt-tightening consumers and the effect of healthier eating trends. The stock is down approximately 25% from its 2022 highs.
NASDAQ: PEP
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If you think long-term, however, this is likely to be an opportunity. Management is working to return to stronger growth. That effort has included brand acquisitions to better align with consumer trends and working with an activist investor to streamline the business. Indeed, PepsiCo is a bit of a turnaround story right now. However, it's also a Dividend King.
Achieving Dividend King status is no small feat. Increasing a dividend for 50+ years requires a strong business model that is executed well in both good times and bad. Right now is a bad time, but if history is any guide, PepsiCo will find a way to survive and thrive in the long term, just as it has many times before. You can collect the stock's historically high 4% yield while you wait.
Image source: Getty Images.
2. Realty Income is boring and reliable
If PepsiCo's turnaround opportunity isn't attractive to you, then you might find Realty Income and its 5.4% yield more to your liking. Realty Income has increased its dividend for 30 consecutive years. It has an investment-grade credit rating. And while it's one of the largest real estate investment trusts (REITs) in the world, it's by far the largest net lease REIT, with a portfolio of more than 15,500 properties.
Size is important in the REIT sector, particularly when coupled with an investment-grade-rated balance sheet. REITs have to pay out at least 90% of their taxable income as dividends, allowing them to avoid corporate-level taxation. That doesn't leave behind much cash for buying new properties.
To fund their growth, REITs, such as Realty Income, tap the capital markets by issuing debt and equity. Realty Income's size and financial strength generally give it advantageous access to cash, so it has a relatively low cost of capital. This gives it an edge when it comes to buying properties.
NYSE: O
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The caveat is that Realty Income's size means that it is likely to grow slowly over time. It simply requires more investment to grow a bigger company. However, given the lofty yield on offer, that probably won't bother conservative dividend investors.
3. Enterprise Products Partners isn't as risky as it may seem
Enterprise Products Partners offers a very attractive 6.7% distribution yield. Interestingly, the highest yield doesn't always mean the highest risk. Like Realty Income, Enterprise is built to be boring, highlighted by its 27-year streak of annual distribution increases. That's basically as long as the master limited partnership (MLP) has been public.
Like Realty Income, Enterprise has an investment-grade credit rating. However, the real story is the MLP's business model. It's one of the largest midstream energy players in North America. That means it owns energy infrastructure, such as pipelines, that help move oil and natural gas around the world. It charges fees for the use of its assets, so the often-volatile price of the commodities it transports isn't all that important to its financial results. Demand for energy, which tends to be strong even during oil downturns, is the real driving force behind the business.
NYSE: EPD
Key Data Points
The caveat here is the MLP structure, which is slightly more complex than that of a traditional corporation. For example, you'll need to deal with a K-1 form come tax time. However, if you can handle a little more legwork with your taxes, this high yielder should be well worth the effort.
Three no-brainer high-yield choices
If you're in the market for high-yield stocks, you should find each of the three options above very interesting. PepsiCo is an out-of-favor Dividend King that may interest those with a higher risk tolerance. Realty Income is a slow and steady tortoise that can serve as a foundational dividend investment. And Enterprise is a hidden high-yield gem in an industry that's normally known for being volatile.
