The S&P 500 index offers investors a paltry return of around 1.2%. That’s like walking through the desert without water for a dividend investor looking for high returns.
But don’t despair: there are high-dividend options. You just have to take on a little extra uncertainty, and that’s why W. P. Carey(NYSE:WPC) has a high yield of 6.5% and Toronto Dominion Bank(NYSE:TD) offers a dividend yield of 5.2%. This is why both are worth buying and holding for a decade or more, despite any added risk.
As 2024 kicked off, WP Carey shareholders were greeted with a dividend cut. Many dividend investors will simply ignore companies that have cut their dividends, assuming the companies are struggling or facing some form of material hardship.
Why else would they cut their dividends? The answer in WP Carey’s case is a strategic business reset.
Image source: Getty Images.
At the end of 2023, WP Carey made the decision that the office sector was facing such serious problems that it no longer made sense to slowly exit the space, which at the time represented 16% of rents. Instead, Net Lease Real Estate Investment Trust (REIT) chose to exit the office sector in one swift move. (With a net lease, the tenant must pay most of the operating costs at the property level.) That was too large a portion of the rental income to lose without a dividend cut.
However, the quarter after the cut, the company increased its dividend. And since then, the payout has been increased every quarter, which is the same quarterly increase frequency as before the cut. That’s why I consider this a dividend reset and not a cut.
The move was made from a position of strength, not weakness, which is what the subsequent dividend increases are actually intended to signal to Wall Street. Furthermore, exiting the office market left WP Carey with cash to invest in new assets, which the company has begun to do and will continue to do through 2025 and perhaps even into 2026. That will lead to growth.
Investors have every right to be bothered by WP Carey’s dividend cut. But it’s important to understand that it was a strategic move and that management is clearly looking to rebuild the 24-year streak of dividend increases it broke when it sold its office properties. With an attractive yield of 6.5%, compared to 3.7% for the average REIT, even conservative high-dividend investors should probably look at WP Carey today.
Toronto-Dominion Bank, better known as TD Bank, allowed its US operations to be used to launder money. That is a very bad thing and shows that the bank’s internal controls were too lax.
The American regulators were not happy with this and imposed a huge fine on the company. They are also forcing TD Bank to improve its anti-money laundering controls and have placed the bank under an asset limit in the US.
None of this is good news, but the asset ceiling is particularly worrying. In short, this means that TD Bank’s US operations are not allowed to grow until the bank has regained the confidence of its US regulators.
TD Bank’s large Canadian operations are unaffected by all this, so the financial giant remains on solid footing. It even increased its dividend when it reported fourth-quarter results earlier this month. That was a statement to dividend investors that they could still count on TD Bank to be a reliable dividend stock, despite the headwinds it faces.
That said, 2025 is likely to be a very difficult year for the company and its shareholders. Thanks to the asset ceiling in the US market, management will make changes to its operations that will hurt profits but free up capital so that the company can continue to serve its customers without interruption.
That will take a bite out of profits. However, it is unlikely that the dividend was increased with the idea that it would only be cut a few months later.
Note that TD Bank weathered the Great Recession without a dividend cut, unlike many US banks. It therefore seems reasonable that it will also survive the current headwinds in the US. If you can wait until the company eventually regains the trust of regulators, you’ll get a hefty 5.2% dividend yield, supported by a still-growing dividend. That’s not bad, if you consider that the average bank yields just under 2.1%.
There are good reasons to be angry at WP Carey and TD Bank. However, if you can look past the negatives, these are both financially strong companies that can pay reliable and growing dividends. You may have to hold your nose if you hit the buy button, but given both companies’ high yields, still-solid businesses, and recent dividend increases, it will probably be worth it.
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Reuben Gregg Brewer holds positions at Toronto-Dominion Bank and WP Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
2 High-Yield Dividend Stocks to Buy and Hold for Ten Years Originally published by The Motley Fool
