The rising interest rate environment has created headwinds for income stocks, since safer alternatives, like CDs, are more competitive. However, CDs don't provide the opportunity for income growth, which is why you might want to look at 6.1%-yielding Realty Income (O 1.03%) and 5.2%-yielding T. Rowe Price (TROW -0.04%). Both have great dividend histories, high yields, and, just as important, strong businesses. Here's what you need to know.
Realty Income is "The Monthly Dividend Company"
It takes a lot of moxie to trademark a nickname like "The Monthly Dividend Company," but that's exactly what Realty Income has done. While that tells you the dividend is paid monthly, it also expresses the incredible commitment management and the board of directors has to paying that dividend. The dividend, for reference, has been increased for 29 consecutive years at a slow and steady 4.3% rate, on average, over that span.
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Realty Income is shockingly boring. It owns single-tenant properties backed by net leases, which require the tenant to pay for most property-level costs. Around three quarters of the over 13,000 properties it owns are retail assets, which are fairly generic and easy to buy, sell, and release. The rest are largely industrial or "special" assets, like casinos and vineyards. On top of that, the real estate investment trust (REIT) has been expanding into Europe, further increasing diversification. That's important because it's roughly three times the size of its next closest peer, in terms of market cap. Realty Income needs as many growth levers as it can get.
That said, size comes with important benefits. For example, its scale and investment grade-rated balance sheet provide it with ample access to debt markets at attractive rates. Meanwhile, the giant market cap makes its stock very liquid, easing access to equity markets as well. In the REIT industry, having a low cost of capital is vital, and Realty Income is positioned well on that score. It can also take on big deals, including the acquisition of other net lease REITs that smaller players couldn't even consider. Realty Income, for example, just announced that it's buying peer Spirit Realty.
Big, high-yield, and reliable, Realty Income is a cornerstone income investment that you'll probably want to own for the rest of your life.
Sticky customers and no debt make T. Rowe Price a great dividend stock
Asset management is a business worth looking at in that customers don't tend to switch providers all that often. That makes the assets that T. Rowe Price manages rather sticky. To be fair, assets under management, or AUM in industry lingo, rise and fall quite frequently, but that's more about the inherent volatility of the stock market. T. Rowe Price gets paid management fees based on its AUM, so earnings can be volatile at times even though customers tend to stick around for long periods.
But a reliable core business is just one of the reasons to like T. Rowe Price and its historically high 5.2% dividend yield. For example, the dividend has been increased for 37 consecutive years, so the payment has grown through market downturns, recessions, and other major world events without a problem. And T. Rowe Price has no debt on its balance sheet. Don't underestimate that, because leverage reduces financial flexibility. With no debt, T. Rowe Price has the ability to muddle through even the deepest of downturns, like the Great Recession, in relative stride.
On the downside, T. Rowe Price's specialty is actively managed mutual funds. Investors are shifting toward index products, like ETFs. But the lack of debt gives management the time it needs to adjust to this long-term customer shift, including opening its own ETFs and offering new products in areas that aren't as impacted. If you're a conservative income investor, this is the kind of stock that you'll want to own and hold forever. And with the stock around 60% below its 2021 high, now could be a great time to add it to your portfolio.
Big yields and reliable businesses make good dividend options
Both Realty Income and T. Rowe Price have lofty dividend yields. They're each pretty reliable businesses. And they're built to survive tough times, which they have both done many times before. If you're looking to add a big yield to your portfolio today, you should take a closer look at both of them. And if you decide to buy, you'll want to hold on to them for a long, long time.
Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.
