If you’re trying to build a passive income portfolio, you’ll likely consider dividend yield when selecting stocks. Don’t focus so much on yield that you miss the importance of buying companies that pay dividends reliably.
For example, T. Rowe Award (NASDAQ: TROW) And Approve real estate (NYSE: ADC) seem likely to continue paying attractive dividends for years to come. But at very high yields Annaly Capital Management (NYSE:NLY) has a terrible dividend history. Here’s why the first two are worth buying and the third should be avoided.
A solid foundation for T. Rowe Price investors
There is no way around this, T. Rowe Price has a volatile business. Indeed, it charges fees to its clients for managing their investments. The fees it charges are based on assets under managementor AUM. Assets under management move in two ways, first through client inflows and outflows, and second, and more importantly, through market ups and downs. When the market goes down, it simply makes less, often much less, depending on the depth of the bear market. T. Rowe Price, however, has been around a long time and knows how to survive Wall Street volatility.
One of the most obvious signs of this is the financial company’s impressive streak of 39 consecutive annual dividend increases. The stock market has gone through a number of bull and bear cycles during that time, and T. Rowe Price hasn’t missed a beat when it comes to dividends. But the second big reason to be interested here is that T. Rowe Price has no long-term debt on its assets. balance sheet. This gives the company enormous room to sustain its business and dividends through the cycle. If you get in today, you’ll get a reliable and attractive 4.1% yield for your troubles.
Okay, Realty is growing fast
Agree Realty reduced its dividend in 2011 due to the bankruptcy of one of its tenants. Don’t neglect the stock for this reason: the dividend has been increasing steadily since 2013, or for about a decade. And, more importantly, the dividend cut came when Agree owned fewer than 100 properties. Today, the net lease real estate investment trust (REIT) owns more than 2,100 properties. (A net lease requires the tenant to pay most of the operating costs at the property level.) It’s just not the same business as it was in 2011.
Agree is now a relatively fast-growing REIT that has rewarded investors with a relatively fast-growing dividend. To be fair, Agree’s dividend has only grown about 6% per year over the past decade. But that’s nearly twice as fast as the net-lease REIT giant Real estate income. The real appeal of Agree, however, is the opportunity that presents itself as it continues to purchase new properties. Given that Realty Income owns more than 15,400 buildings, Agree’s growth runway appears very long. You can earn an attractive 4.8% yield if you buy into this growth REIT.
Annaly’s dividend has been falling for a decade
Annaly Capital is also a REIT, but it specializes in mortgages. It doesn’t buy real estate, but focuses on building a portfolio of mortgage-backed bonds. This is a very different approach, and one that can be difficult to understand if you don’t take the time to thoroughly explore this niche of the REIT industry. Even if you’re willing to take on the task and the risk inherent in the mortgage REIT industry, you’ll still want to consider the company’s dividend history.
Although the dividend yield is huge, at 13%, it has been falling steadily for over a decade. Annaly’s share price followed the dividend cut, leading to a yield that remained attractive throughout this period. However, any dividend investor who purchased Annaly over the past decade and used the dividends to pay for living expenses would have ended up with less income and less capital. This is the worst possible outcome. Things could change in the future, but are you willing to take the risk of further dividend cuts? Most dividend investors should avoid a complicated, high-risk dividend stock like Annaly Capital.
Two to buy and one to avoid
Annaly is a perfect example of why passive income investors need to consider more than just dividend yield when buying a stock. There are much better choices out there, including T. Rowe Price and Agree Realty. Sure, the yields are lower, but history suggests you can count on both of these companies to keep paying you, and likely at an increasing rate.
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Ruben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in Realty Income and recommends. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.
2 High-Yield Stocks to Buy Without Hesitation and 1 to Avoid was originally published by The Motley Fool
