Published Thu, 10 Jan 2019 14:20:10 on Income Investors
Dividend Stocks with Growth
How do you build a baseball dynasty?
Anyone can pick today’s current all-stars, but they come with a price tag to match. The trick comes down to spotting the next crop of top players and signing them at a reasonable price.
The same thing applies to our portfolios. As income investors, we tend to gravitate to the same group of dividend stocks. So as you would expect, that means we cough up big premiums to buy shares.
You know the type of stocks I’m talking about: the likes of Johnson & Johnson (NYSE: JNJ), McDonald’s Corp (NYSE: MCD), and Procter & Gamble Co (NYSE: PG). I have nothing against these companies, but because everyone knows about them, their yields won’t exactly knock your socks off.
What’s the solution?
The trick comes down to spotting the next generation of great dividend stocks. Your smaller, undiscovered businesses that, because of their limited name recognition, offer bigger yields than their larger peers.
I call these stocks my “dividend prospects.” It’s a bit like watching high school or college baseball to find the next batch of all-stars. These companies aren’t household names yet, but they will be one day.
And by virtue of their smaller size, these firms often deliver faster dividend growth over time. That one-two combination of higher upfront yields and bigger distribution hikes creates a powerful formula for high returns.
The good news? The recent stock market downturn has turned some of these dividend stocks into cash cows. Here are five:
Company Market Cap
Atrion Corporation $1.3B
RLI Corp. $3.0B
Extra Space Storage, Inc. $11.6B
National Health Investors Inc $3.2B
Omega Healthcare Investors Inc $7.5B
Source: Yahoo! Finance, last accessed January 7, 2019.
Let’s say a few words about these companies.
If you want to make a lot of money over the next decade, keep an eye on healthcare. Each day, 10,000 baby boomers reach retirement age. That means more pills, more checkups, and more doctor visits.
Great news for real estate investment trusts (REITs) like Omega Healthcare Investors Inc (NYSE: OHI) and National Health Investors Inc (NYSE: NHI). These firms own thousands of senior housing and medical properties across the country. And as healthcare spending continues to grow, these real estate investment companies will likely pass those profits on to unitholders.
You have a straightforward story with RLI Corp (NYSE: RLI): it’s a well-run company offering property and casualty insurance to thousands of customers nationwide. They pay their premiums, you get a dividend—a dividend, by the way, that has rolled in like clockwork for 43 consecutive years. In addition to regular distributions, RLI supplements its payout through annual special dividends. Those extra payments have evolved into quite the income stream over the decades.
Extra Space Storage, Inc.‘s (NYSE: EXR) business doesn’t make a lot of headlines. The company owns thousands of self-storage facilities nationwide, renting them out to customers in exchange for monthly fees. But what the firm lacks in excitement, it more than makes up for in profitability. Thanks to the growing amount of clutter in American homes, more people have turned to self-storage in recent years. And because zoning laws often restrict construction, incumbent firms have the freedom to raise prices each year. As a result, Extra Space Storage has boosted its distribution eightfold since 2010.
Atrion Corporation‘s (Nasdaq: ATRI) story is similar to the above healthcare stocks. Thanks to an aging population, demand for all sorts of medical services will continue to grow. Atrion has carved out a lucrative niche by making medical devices for highly specific markets, from fluid-delivery products to surgical loops used in procedures. That strategy has clearly paid off; last quarter, the company saw earnings jump 16% from the same period last year. More impressively, shares have doubled in value since 2015, recently hitting a new all-time high.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|OMEGA HEALTHCARE INVESTORS||37.43||26.7||1.40||2.64||7.15|
|NATIONAL HEALTH INVESTORS||77.73||21.0||3.70||4.00||5.09|
|EXTRA SPACE STORAGE||87.84||21.1||4.16||3.44||3.93|
|PROCTER & GAMBLE||92.01||24.1||3.82||2.87||3.13|
|JOHNSON & JOHNSON||129.36||258.7||0.50||3.60||2.77|
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