Recently, some of the biggest stocks have reached record highs. Most dividend investors will be disappointed by the S&P 500 index's 1.4% dividend yield. Many good income equities are below $200 a share. Toronto-Dominion Bank (NYSE: TD) and Realty Income (NYSE: O) are worth watching today. What you need to know.
Toronto-Dominion (TD) Bank began paying dividends in 1857. Over 160 years of payments uninterrupted. TD Bank maintained their dividend payment during the Great Recession, unlike other U.S. banks. Income investors should be interested in that impressive story. Using SPDR S&P Bank ETF as an industry reference, the dividend yield is approximately 5%, well above the 2.8% average.
Why is yield high? Several answers exist. First, higher interest rates may hurt the company's Canadian business. The property market in that country has been strong for years, but rising mortgage costs indicate a possible downfall. However, TD Bank's 13.9% tier 1 capital ratio, which measures a bank's resilience, is second in North America. It appears ready for its biggest commercial problems.
Second, the corporation faces regulatory issues in the U.S., where it wants to expand. This would hinder acquisition-led expansion, as the company had to cancel a deal due to regulator pressure. TD Bank can expand internally by building new offices. No matter how TD Bank grows in the U.S., its East Coast presence offers plenty of possibilities.
Overall, the long-term potential is good. If you can handle buying when other investors worry, this financially sound, high-yield bank stock is worth a look today. Realty Income shares have also suffered from higher interest rates. This company pays 5.8% dividends, approaching its 10-year high. There are two issues.
First, rising interest rates favor other revenue sources. Some investors have switched from stocks to CDs for safer income. Higher rates make capital raising more expensive for corporations. Realty Income buys large, institutional buildings via loan and stock transactions as a REIT. This is a real issue, but interest rate changes are priced into the market so REITs may invest in new properties profitably. Eventually, this will pass.
Vanguard Real Estate ETF can be used to buy Realty Income while its yield is far above 4%, the average REIT yield. It has an internationally diverse portfolio and is the largest net lease REIT (net leases compel tenants to pay most property-level operating expenses). It can consolidate the industry (the REIT recently acquired Spirit Realty) and do transactions its contemporaries can't. Realty Income may suit you if you appreciate owning specialized leaders.
Realty Income, an investment-grade company, has raised its dividend annually for 29 years, including during the Great Recession. It has rewarded investors in good and bad markets.
The finest investments sometimes entail buying stocks with flaws. Today's TD Bank and Realty Income story is similar. They are well-run corporations with challenges. Despite obstacles, careful dividend investors can still achieve long-term success. These two high-yield stocks are worth buying now.
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