If you’re an income investor, dividend yield is probably one of the first things you look at when researching a potential stock for your portfolio. That makes sense, but yield alone isn’t enough to determine whether a company is good enough to provide decades of passive income.
For example, a share like AGNC investment (NASDAQ: AGNC) which has a whopping 13% dividend yield is a terrible choice for most passive income investors. Meanwhile, lower yielding Real estate income (NYSE: O), Toronto-Dominion Bank (NYSE: TD)And Alexandria Real Estate Shares (NYSE: ITS) present three great options to add to your portfolio now. Here’s why.
The Problem with Extremely High Yields
AGNC Investment is not a bad company. But this mortgage real estate investment trust (REIT) is complex and focused on total return, not dividends. Yes, the yield is huge at over 13%, but don’t be fooled by the dividend yield. To see why, look at the chart below.
The dividend has been falling for a decade! The stock price has followed the dividend, which is why the yield is so high, despite a terrible dividend history. Sure, you still get dividends, but less income and capital loss are not what most passive income investors really want.
1. Realty Income is a core investment
Realty Income, on the other hand, has increased its dividend every year for 29 consecutive years. The yield is a very attractive 5.1%. And the net lease REIT has a rock-solid investment-grade balance sheet.
It is also the largest player in its real estate niche, with a massive portfolio of over 15,400 assets. It is about four times larger than its nearest competitor in terms of market capitalization. Its portfolio spans North America and Europe, giving it plenty of room for growth.
To be honest, Realty Income is a slow and steady project, but it can provide a solid foundation for your income-oriented portfolio.
2. Toronto-Dominion Bank is a contrarian play
Toronto-Dominion Bank, or simply TD Bank, is one of the largest banks in Canada. The country’s banking regulations are very strict, creating conservative cultures within Canadian banks like TD Bank.
The strict rules also effectively give the largest banks a strong position. So overall, TD Bank is very reliable, having paid dividends every year since 1857. Most companies haven’t even been around that long. The dividend yield is an attractive 4.6%, which is on the high side of the bank’s historical yield range.
Why is the yield so high for such a conservative and reliable dividend stock? Well, TD Bank is facing some legal and regulatory issues regarding its internal controls around money laundering. That’s not good news and it looks like a few bad apples have gotten the bank into trouble.
However, the company believes the issue will be resolved by the end of 2024. Growth may be slow for a while, but given the company’s long history of success, it seems like this is a contrarian play that most passive income investors should consider right now.
3. Alexandria Real Estate Equities is being tarred with the wrong brush
It’s hard to categorize Alexandria Real Estate Equities. On one hand, this REIT owns healthcare assets, which likely have a bright future. On the other hand, it owns offices, which have been doing terribly since the pandemic.
Wall Street seems to be cautious and treating Alexandria as an office REIT, sending the stock down and the yield up to a historic high of 4.2%. You should take the opposite view and treat it as a health care REIT.
The nuance here is important. Alexandria has medical research facilities. Yes, these are offices, but they are also laboratories. You can’t separate the lab space from the office space, as both are vital to the development of new medical advances. To put it simply, researchers can’t really sit at a computer and write up their findings in the same place where they’re playing with chemicals.
Alexandria Real Estate Equities is a pure play in the medical research sector and has a 14-year history of annual dividend increases. Now is the time to buy this misunderstood REIT if you want decades of reliable income.
Don’t go for a high dividend yield
If you’re looking for decades of reliable income, you really have to be careful not to get caught up in a yield chase. You want to find companies with strong returns and proven track records that show they can sustain their dividends over the long term. Realty Income, TD Bank, and Alexandria all offer that today.
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Reuben Gregg Brewer has positions in Realty Income and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Alexandria Real Estate Equities and Realty Income. The Motley Fool has a disclosure policy.
Want Decades of Passive Income? 3 Stocks to Buy Now and Hold Forever was originally published by The Motley Fool
