Dividend-paying stocks have been shown to outperform their non-dividend paying peers and that's made dividend paying stocks a key holding for wealthy investors looking to maximize returns in their portfolios. However, not all dividend-paying stocks are worth owning in portfolios, and for that reason, we asked some of our top Motley Fool contributors what high dividend-paying companies might be perfect for wealthy investors' investment accounts. Read on to find out which three companies make the most sense to buy.
Todd Campbell: Diversifying risk across more stocks is a big benefit of a supersized portfolio, because it allows wealthy investors to own some riskier high dividend payers, such as AbbVie (NYSE:ABBV), alongside their steady-eddy stalwarts.
Many income investors are shunning AbbVie because the composition of matter patent is expiring on its top-selling autoimmune drug, Humira, whose $14 billion in sales last year accounted for 61% of the company's total haul, and that makes this patent expiration nothing to ignore. Generics, however, may not challenge Humira as soon as some people think.
That's because Humira has method of use patents that could delay generics until 2020 or later. Even if Humira copycats do hit the market sooner than that, they'll be biosimilars, not exact copies, and that may mean that doctors stick with Humira, especially if AbbVie competes on price.
As evidence of management's confidence in its strategy to protect Humira, the C-suite offered up guidance in January that calls for Humira sales to climb, rather than shrink, to $18 billion in 2020.
If management is right, then AbbVie still has time to build momentum for other drugs that can offset any future impact from biosimilars. Yes, AbbVie's got risks, but investors with deep enough pockets may find its 4% dividend yield attractive enough to warrant accepting those risks.
Daniel Miller: This pick will surprise anybody who has read a Caterpillar (NYSE:CAT) article by me over the past two years. That said, if you're a wealthy investor who can hold on to stocks for the long-term despite current headwinds, Caterpillar's dividend yield of about 4% and consistent dividend raises make it a valuable option.
The questions facing potential Caterpillar investors are simple: Is the dividend safe and when will its business improve? Unfortunately, the answer to the latter isn't 2016. Business headwinds include uncertain China and Brazil economies, continued anemic construction demand, weakness in oil and gas markets, slumping commodity prices, and, to top it all off, a strong U.S. dollar.
The truth is those headwinds aren't going away this year, and Caterpillar's business will hurt because of it -- sales and revenue are expected to drop another 10% this year. The good news is that Caterpillar's becoming a much leaner and more efficient operation for when the good times come back and the dividend appears safe.
More specifically, while its dividend payout ratio recently jumped over 80%, it's worth noting that it's much lower when you back out restructuring costs, which won't always weigh on profits. Also, Caterpillar's machinery, energy, and transportation (ME&T) debt-to-capital ratio checked in just under 40% at the end of 2015, within its historical range. And the company's ME&T operating cash flow was a $5.2 billion last year. Management has noted that strong cash flow and maintaining its dividend -- which, for the record, wasn't cut during the financial crisis -- are high priorities.
For wealthy investors who can hang on to shares for many years, Caterpillar has a solid balance sheet and strong cash flow and continues to cut global costs, making it a solid stock that will pay you a 4% yield while you wait for its global business environment to improve.
Steve Symington: To be honest, I think it's a misconception that "wealthy" investors should approach the stock market any differently than any other retail investor. Any person should be able to appreciate the value of letting their money "work" for them through buying shares of good-quality, high-yield dividend stocks. To that end, I think Retail Opportunity Investments (NASDAQ:ROIC) fits the bill perfectly. Retail Opportunity Investments focuses on buying and revitalizing grocery-anchored shopping centers in the western United States, primarily in densely populated, middle- to upper-class neighborhoods.
Most recently, the company has demonstrated that its slew of acquisitions -- including $479.6 million to acquire 12 new grocery-anchored properties last year alone -- is beginning to fall to the bottom line in earnest. Last quarter, revenue rose 22.9% year over year, and funds from operations (an effective measure for its cash flow from operations) grew 28.2% to $25.9 million, and 19% on a per-share basis, to $0.25. What's more, it just capped its second consecutive year with a portfolio leased rate above 97%, and demonstrated healthy pricing power with a more than 18% increase on same-space comparative base rent.
As a real estate investment trust, Retail Opportunity Investments also must return at least 90% of its taxable net income to shareholders in the form of dividends, which makes for an attractive current annual dividend yield of 3.7% at today's prices. For any investor willing to buy shares in these still-early stages of growth and watch as Retail Opportunity Investments steadily expands its presence, I think the power of compounding returns should result in staggering financial rewards.
Daniel Miller has no position in any stocks mentioned. Steve Symington owns shares of Retail Opportunity Investments. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Retail Opportunity Investments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.