Income investors have become more open to dividend stocks in recent years. With rock-bottom interest rates at the bank and low inflation, dividend stocks drew interest despite a modest 1.5% average dividend yield for the S&P 500 over the last five years.
However, in recent years, higher inflation and rising interest rates have drawn income investors away from many dividend stocks. Still, some stocks offer returns that could hold appeal in today's more inflationary environment, and these could provide a steady stream of income and likely stock gains in the long run.
Altria
Tobacco giant Altria(NYSE: MO) may seem like one of the more counterintuitive places to seek dividend income. The medical industry and government have highlighted the health risks and addictive nature of its primary product for decades.
Consequently, tobacco use has declined over that time, and the industry has had to pay hundreds of billions of dollars in settlements. The latest was a $462 million settlement involving e-cigarette Juul in the spring of 2023.
Despite these challenges, product diversification and price increases have helped Altria maintain a rising payout. In fact, it has become one of the best dividend stocks in the S&P 500.
It has hiked its dividend yearly since 2010, and the "cuts" in the late 2000s involved divestitures. Thus, the increases go back further when considering those. The current annual payout of $3.92 per share takes the dividend yield to 9.6%.
The dividend appears stable. In the first nine months of 2023, Altria reported a free cash flow of just under $6 billion and dividend expenses of just over $5 billion. This means it can afford the dividend and the $732 million spent on share repurchases.
Still, that leaves little room for other investments, and the stock fell by around 13% in 2023 and about 15% over the last five years. Still, if you're looking for income, the stock appears increasingly able to continue providing a rising income stream.
Realty Income
You can't discuss dividend stocks in the S&P 500 without including "The Monthly Dividend Company," Realty Income (NYSE: O). This real estate investment trust (REIT) owns more than 13,250 stand-alone properties in five countries. Tenants sign long-term "net leases" in which the renter covers the maintenance, insurance, and property taxes.
Contrary to popular belief, consumers still visit stores, restaurants, and other establishments in person, despite the growing popularity of e-commerce. In fact, Realty Income's number of properties continues to grow. In the third quarter of 2023, the company acquired 289 properties. Among its numerous tenants are some of the more well-known businesses in the country, including Dollar Tree, FedEx, and AMC Theaters.
Moreover, its monthly dividend rose periodically throughout 2023. That took the annual payout to almost $3.08 per share, a yield of 5.4%. Furthermore, the company earned $2.1 billion in funds from operations (FFO) income in the first three quarters of the year, leaving Realty Income with enough to finance its $1.6 billion in dividend costs during the period.
Admittedly, the stock fell as a rising rate environment put pressure on real estate stocks. But with the Federal Reserve indicating an intent to reduce the federal funds rate, optimism has returned to the stock. Investors are therefore likely to profit from Realty Income's stock price growth and growing stream of monthly dividend payments.
Innovative Industrial Properties
Innovative Industrial Properties (NYSE: IIPR), known informally as IIP, is a REIT that provides facilities for medicinal cannabis growers. The industry it serves faces considerable restrictions amid the continuing federal prohibition of marijuana. Bank loans are difficult to obtain, and a company's ability to operate varies by state.
To solve this problem, IIP uses a sale-leaseback program that provides financing by buying a company's property and leasing it back to the former owner.
As the industry came under pressure in the last two years, IIP stock cratered as the number of non-paying tenants rose. However, almost every REIT periodically deals with non-paying tenants, and IIP has proven adept at renegotiating terms or selling properties when a payment arrangement is not workable.
The stock showed its safety by declaring the first payout hike in five quarters. At $7.28 per share annually, the stock now yields 7.2%. Also, in the first nine months of 2023, IIP earned $173 million in FFO income. The company paid $153 million in common and preferred dividends, indicating it can afford its payout.
Additionally, the stock has risen more than 60% from its low in May as the cannabis industry begins to recover. This indicates that investors will not only earn a considerable dividend return, but could also profit from a rising stock price.
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Will Healy has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends FedEx, Innovative Industrial Properties, and Realty Income. The Motley Fool has a disclosure policy.
