The stock market has been on an upward path of late, with some of the most prominent stocks hitting astronomical highs. The dividend yield on the S&P 500 index is a paltry 1.4%, a low level that will probably leave most dividend investors dismayed. But you can still find attractive income stocks, many of which are trading well below $200 a share. Two that are worth a close look today are Toronto-Dominion Bank (TD 0.02%) and Realty Income (O 1.03%). Here's what you need to know.
Toronto-Dominion has an incredible dividend history
Canadian TD Bank, as Toronto-Dominion is more commonly known, started paying dividends in 1857. That's more than 160 years of uninterrupted payments. In fact, when major U.S. banks cut their dividends during the Great Recession, TD Bank held its payment steady right through the deep economic downturn. That's an impressive story and one that should interest income investors. Today the dividend yield is almost 5%, notably above the average bank's yield of 2.8%, using SPDR S&P Bank ETFas an industry proxy.
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Why is the yield so high? There are a couple of answers. First, there are concerns that rising interest rates will be a headwind to the company's core Canadian business. The housing market in that country has been robust for years and there's a fear that a material downturn could be in the cards as homeowners face increasing mortgage costs. That said, TD Bank's tier 1 capital ratio, a measure of how well a bank is prepared for adversity, of 13.9% is the second best in North America. It seems well prepared for trouble in its largest market.
Second, the company is dealing with regulatory concerns in the U.S, a region in which it is attempting to expand. This will be a headwind to acquisition-led growth, noting the company had to scuttle a deal because of regulator pushback. But TD Bank can still build new offices, expanding its business from within. With a largely East Coast presence, there's a lot of opportunity ahead no matter how TD Bank goes about growing in the U.S.
Basically, the long-term opportunity here still looks attractive. If you can stomach buying while other investors are worried, this financially strong, high-yield bank stock is worth a close look today.
Realty Income will adjust to higher rates
Higher interest rates have also been a drag on the shares of Realty Income. This stock offers a dividend yield of 5.8%, which is near its highest levels of the past decade. There are two issues.
First, higher interest rates have made other income alternatives more attractive. That's led some investors to switch out of stocks and into safer income sources like CDs. Second, higher rates make it more expensive for companies to raise capital. As a real estate investment trust (REIT), Realty Income frequently taps the capital markets with debt and equity sales to buy large, institutional-level properties. This is a very real issue, but interest rate moves eventually get priced into the market so that REITs can profitably invest in new assets. In other words, this too shall pass (eventually).
In the meantime, investors can buy Realty Income while its yield is far above the 4% or so offered by the average REIT, using Vanguard Real Estate ETFas a proxy. It also happens to be the largest REIT in the net lease subsector (net leases require tenants to pay most property-level operating expenses), with a globally diversified portfolio. It has the size and scale to do deals that its peers couldn't manage, including acting as an industry consolidator (the REIT recently completed the acquisition of peer Spirit Realty). If you like owning companies that dominate their niches, Realty Income is likely to be a good fit for you.
Oh, and investment-grade-rated Realty Income has increased its dividend annually for 29 consecutive years, including through the Great Recession. It has proven that it knows how to reward investors through good markets and bad ones.
Not perfect, but very attractive
Sometimes the best investment opportunities require buying stocks that have some warts. That's basically what the story is for TD Bank and Realty Income today. They are well-run companies that are facing some headwinds. The headwinds aren't likely to derail the long-term opportunity for patient dividend investors. Now is a great time to consider buying these two high-yield stocks.
Reuben Gregg Brewer has positions in Realty Income and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Realty Income and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
