Dividend-Paying Stocks are a Must for Any Portfolio These Days. Here are 5 that Look Best Positioned for the Coming Year.
With interest rates stuck at very low levels, it’s harder than ever to get a decent income from safe investments.
The average money market account yields 0.96%.
The average 1-year CD yields 1.97%.
And the average 5-year CD yields just 2.06%—hardly reason to consider anything longer than a year.
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But there are many high-quality stocks that pay higher yields, plus give you a chance for capital appreciation, and that’s my focus today in recommending the best dividend-paying stocks for 2020.
Granted, when you invest in stocks, there’s always the possibility that your investment will decrease in value, but with the recommendations below (which have been selected by Cabot’s expert financial advisors) the odds are very good that as a whole, they will appreciate in value rather than depreciate.
And this brings up a very important point about investing in stocks: the best way to reduce the risks of stock ownership is to diversify, and not just among companies but among industries. In my opinion, the minimum number of stocks to own is five, but for larger accounts, 10 is a better target.
For investors looking for regular income that’s way better than a CD can provide, these are the five best dividend-paying stocks for 2020; you’ll notice that they’re well diversified.
Best Dividend-Paying Stocks for 2020
Best Dividend-Paying Stock for 2020 #1: Brookfield Infrastructure Partners (BIP) Yield 4.0%
Bermuda-based Brookfield Infrastructure Partners is a Master Limited Partnership (MLP) that owns and operates infrastructure assets all over the world. The company particularly focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry. While infrastructure investing has recently started to boom, Brookfield, which was established in 2008, was early to the party. BIP had the foresight to scour the globe and pluck the very best assets before much of the potential competition got wise to the phenomenon. It now has valuable partners and contacts all over the world that enable the company to find profitable projects as they become available. Since 2009 the partnership has grown funds from operations (FFO), the key determinant of cash flow for MLPs, by an average of 16% per year. Over the last 10 years the stock has returned 632% (with dividends reinvested) for an average 22% annual return, double the return of the S&P 500 over the same period.
Brookfield has a current portfolio of 2,000 assets in 30 countries on five continents.
• Toll roads in South America
• Telecom towers in France
• Railroads in Australia
• Natural gas pipelines and storage in North America
• Utilities in Brazil
• Ports in Europe, Australia and North America
• Date centers on three continents
However, about 80% to 85% of revenues are in U.S. dollars or dollar-hedged, which reduces currency risk. As a Master Limited Partnership (MLP) BIP pays no income tax at the corporate level provided the bulk of earnings are paid out to shareholders in the form of distributions. As a result, it has a higher payout than most regular dividend stocks. The payout is well supported as the current payout ratio is just 63.5% of FFO, which is very low for an MLP. The low payout ratio is actually a big key to future growth as well. It enables Brookfield to retain its own funds to invest in growth. Additionally, the company is now relying on asset rotation in addition to retained earnings. The idea is to sell mature assets when returns have maximized and use the proceeds for high return projects. And it’s working like a charm.
Best Dividend-Paying Stock for 2020 #2: Designer Brands, Inc. (DBI) Yield 6.4%
Designer Brands operates DSW Warehouse and The Shoe Company stores, with over 1,000 locations in 44 U.S. states and Canada, and Camuto Group. DSW was the #1 omni-channel retailer in the U.S. in 2017 and 2018, and has delivered 27 consecutive years of sales growth. Management is now drawing upon the most successful individual aspects of DSW Warehouses, The Shoe Company, and Camuto Group, and applying those profit-generating processes to each of these three divisions of the company in order to escalate revenue and gross margin growth. For example, Designer Brands recently acquired Camuto Group, which is the leader in private brand footwear in the U.S. Private brand footwear carries about 10 percentage points of higher gross margin than branded footwear, so Designer Brands plans to use Camuto’s expertise to provide new brands to DSW Warehouses that will then boost total-store gross margins. DBI is an undervalued growth stock with a hefty dividend yield. Expected EPS growth rates are 15.1% and 13.6% in 2019 and 2020, while the P/E is moderate at 10.0. Investors who buy now will lock in a tremendous dividend yield.
Best Dividend-Paying Stock for 2020 #3: Innovative Industrial Properties (IIPR) Yield 5.5%
Sector: Real Estate
IIPR is a Real Estate Investment Trust (REIT) that currently owns 44 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio and Pennsylvania, totaling approximately 2.9 million rentable square feet—all of which it leases to companies involved in some aspect of the cannabis business. And it recently finalized two more sale-leaseback transactions in Pennsylvania and North Dakota. The two properties combined cover around 105,000 sq. feet of industrial space, and the purchase price was around $24.1 million in total. But IIPR doesn’t grow or sell marijuana; it just charges rent to companies that do—so everything it does is totally legal nationwide, which is why it has no trouble getting investors for its assets. Analysts are looking for EPS of $2.87 in 2019 and $5.46 in 2020. As a REIT, this stock is subject to some forces that don’t impact most cannabis companies—and that can be both good and bad. But if you want relatively low risk exposure to the fast-growing cannabis industry, and a hefty dividend to boot, consider this marijuana stock. The REIT was a star performer until July, when it got dragged down by the collapsing cannabis sector, and it’s now roughly 45% off its old high—very much a bargain.
Best Dividend-Paying Stock for 2020 #4: Rio Tinto (RIO) Yield 5.1%
Sector: Metals and Mining
London-based Rio is one of the world’s premier multinational mining and commodity firms. Operating across 35 countries, with half of its current operations in Australia, it supplies the world with gold, diamonds, copper, titanium, iron ore and other industrial metals. Australia represents a safe backdoor Pacific growth play supported by rock-solid fundamentals. China, Japan, South Korea, India and Hong Kong are the country’s leading export destinations. China buys 35% of Australia’s exports (America buys only 6%) and boatloads of its oil, gas, coal and iron ore. Millions of Chinese tourists each year visit Australia and more than 150,000 Chinese students head to Australian universities. Australia offers many advantages over the competition—a low national debt, the safest banks with the highest dividends in the world, and a location near the world’s fastest-growing continent, Asia, with consumers eager to snap up its resources and products. In the first half of 2019, Rio’s cash flow from operations increased 22% to $6.4 billion compared to a year earlier. Underlying earnings jumped 12% to $4.9 billion and dividends and share buybacks increased. And pro forma net debt shrank 40%. Its balance sheet is much improved and it has $9.6 billion in cash. As some key commodities such as copper seem to be beginning an uptrend, Rio offers good value and a fat dividend yield today.
Best Dividend-Paying Stock for 2020 #5: Valero Energy Corp. (VLO) Yield 3.9%
Valero is the largest petroleum refiner in the U.S., with 15 petroleum refineries in the U.S., Canada and the U.K. with a capacity of about 3.1 million barrels per day (MMbpd). It markets products in 43 states, Canada, the U.K., Ireland and Latin America and has over $100 billion in annual revenues. In addition, the company also operates 14 ethanol refineries, accounting for more than 20% of all U.S. exports, a rapidly growing renewable diesel business, and midstream piping and storage assets.
But the main event is still petroleum refining, which is a tough and unpredictable business. Profits are primarily determined by volume and “crack spreads,” the difference between the cost of producing a barrel of refined product and the price at which it is sold. Consequently, profits are always at the mercy of various commodity prices and their relationship with each other as well as the ever-fluctuating supply/demand dynamic.
While the short term of these trends is always hard to predict, the longer trend provides a more accurate read—and the broader trend is still strong for American refiners, thanks to the American energy boom. Refined products are priced by the international benchmark, even in the U.S., giving American refiners a distinct advantage of cheaper crude oil feedstock. Lower costs make higher margins. In addition, Valero refineries are the most complex and efficient in the sector. The company has flexibility that others don’t, like the ability to refine cheap heavy crude from Canada or light, sweet U.S. crude depending on which offers the higher margins at the time.
Valero can also produce more climate-conscious products in growing demand like renewable diesel, NGLs, ethanol, and new lower sulfur fuels required by the International Maritime Organization (IMO) starting in 2020. Valero is the lowest-cost producer in the space and operates profitably even in lousy conditions. Plus it pays the largest dividend of the refining majors. The dividend is well supported with a low target payout ratio of 40% to 50% and a solid balance sheet with debt levels well below the industry average and a 52% debt/equity ratio.
But the best reason to buy it now is timing. The stock is down over 25% in the past year and 34% off the 2018 high, and if you buy here, you lock in a big dividend yield.
More Dividend Stocks
Those are the five best dividend-paying stocks for the year ahead. But if you want to learn the names of the many other dividend stocks we’re currently recommending, I highly suggest you take out a subscription to Tom Hutchinson’s Cabot Dividend Investor advisory. To learn more, click here.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More