As the stock market has moved higher, one victim has been dividend yields. With the average payout for the S&P 500 down to just 1.25%, such stocks have lost a bit of appeal at a time when investors can earn a guaranteed return of around 5% in some certificates of deposit.
Nonetheless, you don’t need to look far to find stocks with high, sustainable dividends and significant potential for stock price growth. Even with a budget of $3,000, a $1,000 investment in each of these stocks can bring a quick stream of dividend income without undermining the potential for stock price growth.
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Admittedly, AT&T‘s (NYSE: T) recent dividend history may make its stock a strange choice at first glance. In 2022, the company abandoned a 35-year streak of payout hikes, slashing the dividend by 45%. It has remained at the $1.11-per-share level since then, yielding 4.8% at current prices. AT&T also carries a massive total debt of $129 billion, a huge burden considering its $116 billion in stockholders’ equity.
However, the dividend is holding up well considering this challenge. The debt fell by $8 billion over the previous nine months. Additionally, thanks to its $17 billion to $18 billion in free cash flow forecast for 2024, AT&T can pay for debt reduction while covering the $8 billion annual dividend cost.
Moreover, because of a near-exclusive focus on its wireless network and fiber, AT&T has added nearly 1.2 million wireless net customers and over 700,000 fiber net customers in the first nine months of 2024. That growing customer base allows AT&T to solidify its business.
Investors are taking notice of such improvements, and the stock price has risen 45% over the last year. With a relatively low P/E ratio of 19, investors may have an added incentive to buy AT&T stock now before the rising stock price further reduces its dividend yield.
The idea of buying a cannabis-related real estate investment trust (REIT) like Innovative Industrial Properties (IIP) (NYSE: IIPR) may seem counterintuitive right now. Although IIP serves only medical cannabis growers, the Republican sweep in the 2024 elections could slow a continued legalization process.
Also, in recent quarters, a rapid growth rate came to a halt amid problems with some non-paying tenants on its 108 properties. However, IIP proved itself adept at managing such properties by either unloading them or finding new tenants to take their places.
The company has also hiked its dividend at least once per year since beginning its dividend in 2017. Consequently, its $7.60-per-share annual payout yields 7.2%. That was less than $8.11 per share in funds from operations (FFO) income over the last 12 months, meaning it can sustain its dividend.
Even with the significant pullback after the election, IIP stock is still up 33% for the year. Thanks to that discounted stock price, IIP stock sells at a price-to-FFO ratio of around 13. Between that valuation and the massive dividend yield, IIP offers a huge incentive to wait on a likely recovery from the recent pullback.
Realty Income (NYSE: O) is a REIT specializing in single-tenant commercial properties. It rents such buildings on a net lease arrangement, meaning the tenant pays for the taxes, insurance, and maintenance of the properties. This means the company can retain more of the revenue from the properties as profit.
Moreover, nearly 99% of the company’s approximately 15,500 properties have tenants. Hence, it continues to develop and acquire more property to raise its revenue over time. Admittedly, the higher interest rates over the last few years have weighed on the stock and its profitability.
Nonetheless, the lower price has also increased the dividend yield. Its $3.16-per-share annual payout yields about 5.6%, far surpassing the S&P 500 average. Also, higher rates have not stopped the company from raising its payout, and its dividend has increased at least once per year since its inception in 1994.
Finally, while higher rates have had Realty Income stock trading more than 30% below its 2020 high, the falling rates should increase the company’s profitability. At a price-to-FFO ratio of about 14, that could set up investors to benefit from a sizable dividend and, later, a long-awaited stock recovery.
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Will Healy has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.
