Investing in the stock market can sometimes be a test of investors' patience. Over the past 15 years, the broad-based S&P 500 has plunged by more than 50%, only to completely erase these losses within a matter of years twice (the dot-com bubble and the Great Recession). Long-term investors are well aware that the stock market tends to go up over the long-term, and has returned about 7% annually -- but that doesn't make it any easier holding onto stocks when the broad market indexes nosedive. This is where dividend stocks come in.
Dividend stocks can "yield" big gains
Dividend stocks offer a bounty of advantages over non-dividend stocks, which makes them attractive long-term holds. The obvious difference is that dividends provide a hedge during a downturn. The average yield of the S&P 500 is just over 2%, and while that won't negate a stock market correction lower, it's better than nothing.
The two more important advantages of dividend stocks are that they usually imply a healthy business model and they can be reinvested to supercharge your long-term gains. Companies typically won't pay a regular dividend to investors if they don't believe their business model is on solid footing. By a similar token, being able to reinvest your dividends over the long run can allow you to buy more shares of dividend paying stocks, which yields bigger payouts, and even more shares. This compounding pattern is what lends to rapid wealth creation.
The thing about dividends is that investors can be lured solely based on yield, which isn't necessarily a good thing. As investors, we want the highest yield imaginable so we can boost our reinvestment potential. But yields can rise because stock prices are falling. If investors aren't able to decipher whether a high yield is the result of a healthy shareholder return policy or a struggling business model, there could be problems.
With this in mind, I figured we'd take a brief look at four safe stocks with healthy dividend yields north of 5%. By "safe," I mean companies with below-average volatility and proven business models that won't leave you sleepless at night.
There had been concerns as recently as last year that U.K. drug giant GlaxoSmithKline (GSK 0.14%) may need to lower its superior dividend due to the loss of exclusivity on inhaled asthma and COPD medicine Advair. But GlaxoSmithKline's management team stuck to its guns and called for double-digit earnings accretion in 2016 on the heels of new drug growth, and that's exactly what it delivered in the first quarter.
A big component of GlaxoSmithKline's future growth prospects lies in its newly found revenue diversity. After completing a three-part asset swap with Novartis in 2015, GSK now derives substantially more revenue from vaccines and a joint-venture in consumer healthcare with Novartis than before the transaction. Though these segments may be lower margin, they're also considerably more cash flow consistent -- and the market loves predictability.
Within its pharmaceutical segment, GSK can rely on growth from next-generation HIV therapies vis-à-vis its majority ownership in ViiV Healthcare, as well as the steady growth in its next-generation, long-lasting COPD and asthma therapies (Breo, Anoro, Incruse, and Arnuity).
GlaxoSmithKline is currently yielding 5.3%, and could be a smart pick-up for income-seeking investors.
Telecom giant AT&T (T 1.27%) sits right on the cusp of inclusion with a 5% dividend yield, but its superior market position and extremely low volatility should allow income investors to get a good night's sleep.
One of the biggest advantages for AT&T, and why it's such a great investment in the first place, is the relatively high barrier to entry in the telecom space. It takes billions upon billions of dollars to build a wireless network, and the infrastructure needed to run that wireless network, from the ground up. You don't even need to use all of your fingers on one hand to count up how many telecom companies in the U.S. can support such hefty reinvestment, and AT&T is one. Because there's little in the way of wireless choices, this grants AT&T strong pricing power, which it then uses to boost costs for its highest-margin product: data plans.
AT&T also has a unique long-tail growth opportunity with its acquisition of DIRECTV. The purchase immediately catapulted AT&T into the No. 1 spot for TV subscriptions, and it also boosted its broadband subscriptions. Most importantly, DIRECTV gives AT&T a platform to promote new video services through satellite boxes and via mobile devices.
AT&T has done a good job of moving beyond wireless, and income investors would be wise to give it a closer look.
Corrections Corporation of America
It may not be the most feel-good investment, but for-profit correctional facility operator Corrections Corporation of America (CXW 0.35%) provides a way for income investors to consistently receive a superior yield relative to the S&P 500.
The clear catalyst here is that the U.S. locks up more people per capita than any other country. Based on statistics provided by The Sentence Project, some 1.51 million people were locked up in 2014, which is more than double where things were in 1990. This currently works out to nearly 700 people incarcerated per 100,000. Comparatively, China, France, Germany, and Sweden incarcerate 119, 100, 78, and 60 respectively per 100,000. As long as incarceration rates remain high in the U.S., the need for correctional facilities, and the pricing power derived from that demand, should remain strong.
The real secret weapon here (for investors) is that CCA, as it's also known, is a real estate investment trust, or REIT. REITs aren't taxed like normal corporations, allowing them to keep more of their profits. In return, they're required to return 90% or more of their profits to shareholders in the form of a dividend. As such, current investors are reaping a juicy 6.7% yield! Also, while most REIT dividends are taxable, it's also possible that some aspects of a REIT payout could be nontaxable depending on how depreciation is recognized by the REIT in question.
Last but not least, we have the highest yielding safe stock of the bunch, HCP (PEAK -0.95%). Like CCA above, HCP is a REIT; but it has a very specific focus on healthcare properties.
Why healthcare properties? Simple. America's population is growing older and life expectancies are lengthening. Based on estimates from the U.S. Census Bureau, the elderly population is expected to practically double from 39.4 million in 2010 to 78.9 million by 2050. This includes a more than tripling in the oldest old (defined as 85 years old or older) to 18.2 million in 2050 from 5.7 million in 2010. It's no secret that older Americans are going to need more care, thus a growing focus on every aspect of healthcare, from senior housing to hospitals and life science companies. HCP expects to earn its living by purchasing healthcare properties and then living off of progressively higher lease rates built into long-term lease contracts. The company can also reap profits from the sale of existing properties.
A more immediate growth driver for HCP is its upcoming spin-off of HCR ManorCare, its skilled-nursing facilities operations. Spinning off this business could wind up unlocking shareholder value, and it'll certainly place HCP on more solid footing since its remaining revenue streams from senior housing, medical office buildings, hospitals, and life science buildings provide steadier growth prospects than skilled nursing.
HCP and its 7.1% yield are certainly worth a look.