A high return alone is not always a good indication of the attractiveness of an income investment. Very often, high returns are a sign that Wall Street is concerned about a company’s future. This is why investors looking for decades of passive income should take a step back and assess more than just dividend yield.
At this moment, Real estate income (NYSE:O) And Toronto Dominion Bank (NYSE:TD) both offer attractive returns. Here’s a quick look at the companies backing their above-average returns.
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When it comes to dividend stocks, Realty Investment Trust (REIT) Realty Income is a total snoozefest. That’s great news if you’re looking for a company you can own for decades, especially since it offers a hefty 5.5% dividend yield. That’s well above the REIT industry average of about 3.9%, using the Vanguard Real Estate Index ETF as a sector proxy.
Realty Income has increased its dividend annually for 30 consecutive years and its balance sheet has an investment-grade rating. It’s the largest net lease REIT (meaning tenants pay operating expenses at the right level) you can buy and one of the largest REITs of any kind.
The REIT has an incredibly diverse portfolio, with approximately 15,400 properties across North America and Europe. While it has a strong focus on retail (about 73% of rentals), it also has exposure to industrial assets (17%) and some unique properties that fall into the ‘other’ category (10%), such as vineyards and casinos.
Why is the yield so high? Real estate income is so great that slow and steady growth is probably the best you can expect. Think low to mid single digit dividend growth, which is essentially what has happened over the last thirty years.
However, if the REIT can continue to grow its dividend by 4% over time, the yield will still be very attractive considering the dividend yield. (Add the two together and you get an annual yield of about 9.5%.) And the dividend growth rate of 4% is above the historical growth rate of inflation, which is closer to 3%, so the purchasing power of the dividend is increased over time.
You won’t brag about Realty Income at cocktail parties, but you’ll probably be glad you own it anyway.
The big appeal of Toronto-Dominion Bank, commonly called TD Bank, is its yield. With a yield of approximately 5.2%, the return is more than twice as high as the 2.4% return you would receive from the average bank, based on the SPDR S&P Bank ETF as a proxy for the sector. There are also many things to like about TD Bank.
For example, it is the second largest bank in Canada and a top 10 bank in North America. It has an investment-grade rated balance sheet. And it has a very diversified business, with consumer banking, corporate banking, insurance and investment banking all in the mix. The bank has also paid dividends continuously since 1857. In many ways it’s a very attractive option for income investors, but there are opportunities today if you think in terms of decades and not days.
Right now, TD Bank’s returns are near the highest in more than 30 years. The only time yields were higher were during the Great Recession and the early days of the coronavirus pandemic.
The reason for this is that TD Bank has gotten itself into trouble with US banking regulators because they have failed to prevent its US banking system from being used to launder money. That’s bad news that resulted in a large fine, additional costs to improve internal controls and the bank imposing an asset limit.
The fines and internal control issues have largely already been settled. However, the asset ceiling will persist and will likely slow TD Bank’s growth in the near term until the bank regains the confidence of regulators (and they allow the bank to expand its U.S. operations again). That’s why investors are so negative about the stock compared to other banks.
However, the bank remains financially strong and its Canadian operations are unaffected by the US headwinds. This is not a good result, but it will certainly not lead to the bank’s demise.
If you don’t mind earning returns that are more than twice the average while you wait for a well-managed bank to get back on the good side of U.S. regulators, TD Bank would consider a can be a great addition to your portfolio.
Don’t just try to find high-yield stocks if you’re looking for a dividend that will last for decades. Look for stocks like Realty Income and TD Bank that offer high yields backed by strong businesses. That could come in the form of a solid industry giant, like Realty Income, or a good company that temporarily falls on hard times, like TD Bank.
Take a closer look at these two outsized returns. It’s very likely that one will end up in your portfolio, especially if your expected holding period is forever.
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Reuben Gregg Brewer has positions in Realty Income and Toronto-Dominion Bank. The Motley Fool holds positions in and recommends Realty Income and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
Do you want passive income for decades? 2 stocks to buy now and hold forever. was originally published by The Motley Fool
