Many high-quality, higher-yielding dividend stocks underperformed the market last year. The primary culprit has been higher interest rates. Higher rates make lower-risk income investments such as bank CDs and government bonds more attractive to investors. That tends to weigh on the value of higher-yielding dividend stocks, which have a higher risk profile, increasing their yields.
Investors can consequently lock in much higher yields on some top-notch dividend stocks these days. Two top dividend stocks to consider doubling up on right now, without overallocating your portfolio, or buying if you don’t already own them are Brookfield Renewable (BEPC -0.12%) (BEP 0.14%) and Realty Income (O 1.17%). They offer high-yielding payouts and have visible upside catalysts, which could help power robust total returns for investors in the future.
Ample power to pump up its dividend
Shares of Brookfield Renewable have slumped more than 10% over the past year. That decline has helped push the renewable energy company’s dividend yield above 5.5%. That’s several times higher than the S&P 500‘s 1.2% dividend yield, which is near its lowest level in more than two decades.
Brookfield Renewable’s share price declined last year even though it was another strong one for the leading global renewable energy producer. Its funds from operations (FFO) were up 11% in the third quarter, keeping it on track to deliver another year of double-digit FFO growth. It benefited from recently completed development projects, acquisitions, and rising power prices.
The company expects to continue growing briskly in the coming years. “The tailwinds for renewables continue to be driven by accelerating corporate demand, primarily from the global technology players to enable their data center and AI development,” CEO Connor Teskey stated in the third-quarter earnings press release. That accelerating demand is enabling Brookfield to develop more projects. It expected to complete 7 gigawatts (GW) of capacity last year and anticipates that its annual capacity additions will rise to 9.1 GW by 2026. These projects should add 4% to 6% to its FFO per share each year.
The company also expects to continue to benefit from accretive acquisitions and from rising power prices — specifically, notching inflation-linked increases embedded in its existing contracts and securing higher market rates as legacy ones expire. Its growth catalysts drive the view that Brookfield can increase its FFO per share by more than 10% annually for the foreseeable future. That easily supports its plan to grow its dividend at a 5% to 9% annual rate. The company has an excellent record of increasing its dividend, having delivered 6% compound annual growth since 2001.
Another solid year
Shares of Realty Income declined by about 7% last year and are down more than 15% from their 52-week high. That slump has pushed the real estate investment trust’s (REIT) dividend yield up to almost 6%.
Realty Income’s stock price slipped even though it had another solid year. The REIT was on track to grow its adjusted FFO per share by around 5%, which is in line with its historical average. A big growth driver was its highly accretive acquisition of Spirit Realty. That enabled the REIT to sidestep some of the headwinds of higher interest rates, which made it more challenging to complete accretive property purchases funded with externally sourced capital (i.e., stock sales and new debt). Despite those headwinds, the REIT was on track to complete an additional $3 billion of property investments last year, exceeding its initial expectations of closing $2 billion of deals.
The REIT also revealed a plan late last year to tap the massive private capital market. That strategy will enable it to earn management fee income, enhancing its investment returns. This new approach positions the REIT to make additional accretive acquisitions without needing to fund deals with external capital.
Realty Income’s growing cash flow has allowed it to continue increasing its dividend. It recently delivered its 128th dividend increase since coming public in 1994. The REIT has now raised its payment for 30 straight years and 109 quarters in a row. There are trillions of dollars in commercial real estate, so with a massive market opportunity and a new funding source, Realty Income should have no trouble continuing to steadily raise its dividend.
A great time to load up on these top-notch dividend stocks
Brookfield Renewable and Realty Income slumped last year, largely because of the impact of higher interest rates on the value of higher-yielding dividend stocks. Those declines enable investors to lock in even more lucrative income streams, which is why I recently loaded up on Realty Income. In addition to that income, they offer lots of upside potential as falling interest rates and continued income and dividend growth help boost their stock prices in the coming years.
Matt DiLallo has positions in Brookfield Renewable, Brookfield Renewable Partners, and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
