Turnaround situations can be very risky, but not all of them. That’s the big picture story when you look at real estate investment trust (REIT) W.P. Carey(NYSE: WPC) and Canadian financial giant Toronto-Dominion Bank(NYSE: TD). Both of these high-yield stocks has fallen on hard times, but neither is facing a situation that should lead to their ultimate demise.
In fact, there are good reasons to think both will be seeing better times ahead. If you have $500 or even $5,000, you should take a look at them today while Wall Street is still downbeat on their shares.
As 2024 got underway, W.P. Carey shareholders were greeted with a reduction in the quarterly dividend, which dropped from roughly $1.07 per share to $0.86. That reduction came just as the REIT would have hit 25 consecutive annual dividend increases, so it was likely a bit of a shock for some investors.
Don’t let this dividend cut dissuade you from buying W.P. Carey. It was really a reset that positions the company for a brighter future. At the end of 2023, W.P. Carey made the hard choice to exit the office sector in one quick move instead of continuing to slowly reduce its exposure, as it had been doing for years.
Image source: Getty Images.
The reason for the change of tactic is that the office sector is facing material headwinds today following the work-from-home trend that took off during the COVID-19 pandemic. This decision likely saved investors from having to deal with years of slow and steady write-offs as office properties bought years ago were sold at a loss.
The move also strengthened W.P. Carey’s overall portfolio, which is now focused on industrial, warehouse, and retail properties. These are areas that are likely to be more attractive over the long term than office properties. And the office exit left W.P. Carey with material liquidity (in the form of cash and lines of credit) to put to work buying more of the attractive assets on which it is now focused.
All of this suggests that growth will pick up in 2025, given that it will take time for management to put its available cash to work.
The strong opportunity ahead is highlighted by the fact that the dividend started growing again the quarter after the reset and has actually returned to the same quarterly-increase cadence that existed prior to the reset. If the dividend reset were made from a position of weakness, management wouldn’t have started to hike the payment again so soon.
If you think in decades and not days, W.P. Carey and its 6.2% dividend yield is an attractive, low-risk turnaround opportunity.
Toronto-Dominion’s shareholders have also had a tough go of it lately thanks to a case of money laundering in its U.S. division. Regulators have slapped the bank with a fine, demanded that it upgrade its internal controls, and placed the bank under an asset cap.
It is a black eye for Toronto-Dominion. And 2025 is going to be a tough year as the bank makes the changes necessary to adjust to the regulatory oversight it faces. Investors are unhappy, as you might expect, and the stock is in the dog house. The dividend yield is currently a historically high 5.1%.
The near-term problem is that an asset cap effectively prevents the U.S. business from growing until TD Bank has assuaged regulator concerns. It could easily take a few years to regain the trust the bank has lost. Although TD Bank’s large and successful Canadian business isn’t impacted by any of this, the U.S. was supposed to be the company’s growth engine.
But the average bank stock, using SPDR S&P Bank ETF as an industry proxy, is yielding just 2.1%. Meanwhile, TD Bank remains financially strong and seems unlikely to cut its dividend (in fact, it just raised the payment by 3%).
If you don’t mind collecting a yield that’s more than twice the bank average while TD Bank works through the money-laundering issue, you should consider adding it to your portfolio. Indeed, the risk/reward balance here seems tilted in the favor of patient, long-term income investors.
There’s no such thing as the perfect company or the perfect investment. Even well-run companies fall on temporary hard times, which is exactly what looks to be the case with W.P. Carey and TD Bank. If you can stomach some near-term uncertainty, stepping in no — while other investors are running for the hills — could leave you with a lofty income stream and the opportunity for solid capital appreciation over the long term.
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Reuben Gregg Brewer has positions in Toronto-Dominion Bank and W.P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
