The stock market is hovering near an all-time high. This has depressed the dividend yield on the stock market S&P 500 index (SNPINDEX: ^GSPC) to a paltry 1.2%, which is not an attractive number if you are a dividend investor. But you can achieve returns of 5% or more Real estate income (NYSE:O) And Toronto Dominion Bank (NYSE:TD). These are two of my top high-yield stocks right now. Keep in mind that there is a barbell on the risk spectrum here.
Real Estate Income: A low-risk income stream
Realty Income offers a dividend yield of approximately 5.1%. Not only is that attractive compared to the broader market, it’s also significantly above the 3.7% yield of the average real estate investment trust (REIT). It is worth noting that the monthly dividend paid has been increased annually for 29 consecutive years.
What exactly does Realty Income do? It’s what’s called a net lease REIT. Netlease REITs generally rent properties with a single tenant and require the tenant to pay most of the property-level operating expenses. While each individual property carries a high degree of risk, within a large enough portfolio this is effectively a very low risk investment approach. Realty Income is the largest net lease REIT, with a market capitalization of just over $50 billion and a portfolio that includes more than 15,400 properties across North America and Europe.
Being so large and diversified, along with the fact that Realty Income has an investment grade rated balance sheet, the REIT has privileged access to the capital markets. This allows this industry giant to compete aggressively for deals and still make a profit. That said, given the size of the company, it’s likely to be a slow and steady grower over time. But if you’re looking for a fundamental holding for your high-yield portfolio, low-risk Realty Income is a name you should get to know very well.
2. Toronto-Dominion Bank: Buy while it’s in the doghouse
The headlines are currently filled with bad news about Toronto-Dominion Bank, commonly referred to only as TD Bank. The country has been fined about $3.1 billion for failing to prevent its US division from being used for money laundering. TD Bank will also be heavily scrutinized by regulators indefinitely until regulators’ trust is regained. During that monitoring, TD Bank will in principle not be able to grow its American activities (this is called an asset cap). None of this is good news, and TD Bank stock is understandably down. The dividend yield is currently around 5.2%, which is historically high for the company.
Hold your nose and buy TD Bank anyway. Why? First, the effect only affects US operations. The bank’s core Canadian activities are performing well and are not hampered in any way. TD Bank is the second largest bank in Canada by deposits and has a protected market position given the country’s heavy regulations. The effect of this fine and the increased supervision of the American market will not lead to the demise of TD Bank.
Second, assuming you believe TD Bank can solve this problem, the bank will eventually return to growth. Notably, the country has set aside all the money needed to pay the fine and has already started improving its internal controls. To be sure, TD Bank has noted that 2025 will be a transition year in which it must differently manage its U.S. operations. But that’s a temporary headwind that will actually set the company up for long-term success because it involves a shift toward higher quality assets. When regulators’ confidence is regained, US growth will resume from a stronger base.
By then, however, the opportunity to buy this high-quality Canadian bank will likely be gone. That’s why now, during the worst headlines, is the time to get on board. You probably still have some time to buy it, or add to an existing position, but if you wait too long you could miss this opportunity to own a fairly low-risk turnaround play. While truly conservative investors may want to avoid TD Bank’s overall risk, most should feel quite comfortable buying it and collecting a fat dividend yield while waiting for better days.
Two high-yield options worth considering
Realty Income is a “play it safe” investment. TD Bank is a higher risk choice, but only because of the negative headlines now swirling around the bank. Both offer returns well above the level of average stocks. And if you put them both together, you get an interesting risk barbell that essentially creates a two-stock, high-return portfolio with moderate risk.
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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.
Here are my top 2 high-yield stocks to buy now was originally published by The Motley Fool
