Finance
2 No-Brainer Dividend Stocks to Buy for Income This May | The Motley Fool
Many companies pay dividends. However, some dividend stocks are better suited for investors seeking income than others because of the durability of their cash flows and the strength of their financial profiles. Those features enable them to pay attractive dividends that steadily grow, even through more challenging periods.
NextEra Energy (NEE 1.51%) and Realty Income (O -0.47%) are two such dividend stocks. They’ve grown their dividends for 30 straight years, which includes three major economic downturns. That growth should continue in the future, even if we have more economic turbulence. Because of that, they’re no-brainer income stocks to buy this May.
High-powered dividend growth
NextEra Energy has done an amazing job of growing its dividend over the years. The utility has increased its payout for more than 30 straight years. It has grown its dividend at a rather brisk 10% compound annual rate over the past two decades. That’s much faster than the average utility and the S&P 500 (^GSPC 1.47%).
A few factors have contributed to its strong dividend growth. The company’s businesses, a Florida-based electric utility (FPL) and a power generation and transmission platform (NextEra Energy Resources), generate very stable earnings backed by government-regulated rate structures and long-term, fixed-rate contracts. That gives it the stable cash flow to pay a lucrative dividend (nearly 3.5% current yield, compared to less than 1.5% for the S&P 500) and invest in growing its businesses. NextEra also has a strong balance sheet, which gives it additional financial flexibility.
NextEra’s businesses also have built-in growth drivers. Florida’s power demand is rising as the population grows, and sunshine is abundant for producing low-cost solar energy. Meanwhile, demand for renewable energy is surging, driving robust growth opportunities for its energy resources segment.
Given the growing demand for power, especially from renewable sources, NextEra expects to continue growing at a healthy rate (at or near the high end of its 6% to 8% annual guidance range through at least 2027). That growth rate and a lower dividend payout ratio for a utility should support continued dividend growth of around 10% per year through at least next year.
Built to pay a growing dividend
Realty Income has a terrific track record of growing its dividend. The real estate investment trust (REIT) has raised its dividend 130 times since it went public in 1994. It currently has dividend growth streaks of 110 straight quarters and 30 consecutive years. The company has grown its payout at a 4.3% compound annual rate over the past three decades.
The REIT collects very stable rental income. It owns a diversified portfolio of properties (retail, industrial, gaming, and others) across the U.S. and Europe, secured by long-term net leases. Net leases produce very stable cash flow because tenants cover all operating costs, including routine maintenance, real estate taxes, and building insurance.
Realty Income owns properties leased to many of the world’s leading companies, including 7-Eleven, Home Depot, and Walmart. It focuses on leasing properties to tenants in economically resilient industries that are relatively immune to the impacts of e-commerce (91% of its annual base rent).
Realty Income has a low dividend payout ratio for a REIT, which enables it to retain significant excess free cash flow to invest in new income-producing real estate (over $900 million last year). The company also has one of the highest credit ratings in the REIT sector, which gives it additional financial flexibility to acquire income-producing commercial real estate.
The company’s financial flexibility enables it to invest billions of dollars each year into new income-generating properties. That helps support the steady growth in its more than 5.5%-yielding dividend.
No-brainer income stocks
NextEra Energy and Realty Income pay dividends that investors can bank on. The companies generate very steady cash flow, which enables them to pay lucrative dividends and invest in growing their businesses. Those growth investments have helped them to steadily increase their dividends over the past few decades.
With durable businesses and strong balance sheets, they should be able to continue raising their payments in the future. Because of that, investors seeking income can buy them without hesitation this month.
Matt DiLallo has positions in Home Depot, NextEra Energy, and Realty Income. The Motley Fool has positions in and recommends Home Depot, NextEra Energy, Realty Income, and Walmart. The Motley Fool has a disclosure policy.
Banks have had a stellar first quarter. The major U.S. banks raked in nearly $50 billion in profits in the first three months of the year, The Guardian reported.
That was largely due to Wall Street bank traders, who profited from a volatile stock exchange, Reuters showed.
But even without the extra bump from stock trading, banks are doing well when it comes to interest, the same Reuters article found. And some banks could stand to benefit even more from this one potential rule change.
Morgan Stanley thinks it could have a major impact on Citi in particular.
Upcoming changes for banks
To understand why Morgan Stanley thinks things are going to change at Citi, you need to understand some recent bank rule changes.
Banks make money by lending out money, which usually comes from depositors. But people need access to their money and the right to withdraw whenever they want.
So, banks keep a percentage of all money deposited to make sure they can cover what the average person needs.
But what happens if there is a major demand for withdrawals, as we saw during the financial crisis of 2008?
That’s where capital requirements come in. After the financial crisis, major banks like Citi were required by law to hold a higher percentage of money in order to avoid major bank failures.
For years, banks had to put aside billions of dollars. Money that couldn’t be lent out or even returned to shareholders.
Now, that’s all about to change.
Capital change requirements for major banks
Banks that are considered globally systemically important banking organizations (G-SIBs) have a higher capital buffer than community banks as they usually engage in banking activity that is far more complicated than your average market loan.
The list depends on the size of the bank and its underlying activity, according to the Federal Reserve.
Current global systemically important banks
A proposal from U.S. federal banking regulators could drastically reduce the amount that these large banks have to hold in reserve.
Changes would result in the largest U.S. banks holding an average 4.8% less. While that might seem like a small percentage number, for banks of this size, it equates to billions of dollars, according to a Federal Reserve memo.
The proposed changes were a long time coming, Robert Sarama, a financial services leader at PwC, told TheStreet.
“It’s a bit of a recognition that perhaps the pendulum swung a little too far in the higher capital requirement following the financial crisis, making it harder for banks to participate in some markets,” he said.
Natasha Luscri and Luke Miller consider themselves among the lucky ones. The couple recently bought their first home in the northwest suburbs of Melbourne.
It wasn’t something they necessarily expected to be able to do, but some good fortune with an investment in silver bullion and making use of government schemes meant “the stars aligned” to get into the market. Luke used the federal government’s super saver scheme to help build a deposit, and the couple then jumped on the 5 per cent deposit scheme, which they say made all the difference.
“We only started looking because of the government deposit scheme. Basically, we didn’t really think it was possible that we could buy something,” Natasha told Yahoo Finance.
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Last month they settled on their two bedroom unit, which the pair were able to purchase in an off-market sale – something that is becoming increasingly common in the market at the moment.
Rather perfectly, they got it for about $20-30,000 below market rate, Natasha estimated, which meant they were under the $600,000 limit to avoid paying stamp duty under Victoria’s suite of support measures for first home buyers.
“They wanted to sell it quickly. They had no other offers. So we got it for less than what it would have gone for if it had been on market,” Natasha said.
“We didn’t have a lot of cash sitting in an account … I think we just got lucky and made some smart investment decisions which helped.”
It’s a far cry from when the couple couldn’t find a home due to the rental crisis when they were previously living in Adelaide and had to turn to sub-standard options.
“We’ve managed to go from living in a caravan because we were living in Adelaide and we couldn’t find a rental with our dogs … So we’ve gone from living in a caravan, being kind of tertiary homeless essentially because we couldn’t get a rental, to now having been able to purchase our first home,” Natasha explained.
Rate rises beginning to bite for new homeowners
Natasha, 34, and Luke, 45, are among more than 300,000 Australians who have used the 5 per cent deposit scheme to get into the housing market with a much smaller than usual deposit, according to data from Housing Australia at the end of March. However that’s dating back to 2020 when the program first launched, before it was rebranded and significantly expanded in October last year to scrap income or placement caps, along with allowing for higher property price caps.
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