Motley Fool - Sun Apr 28, 2:03AM CDT
Dividend investors looking to live off of the income their portfolios generate should favor companies with long and reliable dividend histories. Both Bank of Nova Scotia(NYSE: BNS) and Realty Income(NYSE: O) fit that bill. But right now they are also offering historically attractive dividend yields. That's why you might want to buy now and hold onto these high-yield dividend stocks forever.
Bank of Nova Scotia is a laggard, for now
The bad news is that Bank of Nova Scotia, or Scotiabank, is lagging its Canadian banking peers on key metrics like earnings growth, return on equity, and return on risk-weighted assets. A material part of the problem is that the bank has been working to grow in South America, which is filled with developing countries, while its peers are focused on growing in the United States, which is a developed market. Don't let that scare you away from the stock and its hefty 6.6% dividend yield.
For starters, Scotiabank is one of the largest banks in Canada. That country's banks are highly regulated, leaving them with entrenched industry positions and a conservative management ethos. The company is not throwing caution to the wind, though it is pulling back some from its more aggressive stance in South America. That's going to be a headwind in the near term, but focusing on more profitable markets like Mexico should be a long-term plus for the bank.
Meanwhile, management has stated that it believes the dividend is safe while it rejiggers its business, even if the payout ratio gets a little above the company's target range. And it is worth noting that the dividend has been paid since 1833 and was not cut during the Great Recession, which is what happened to the dividends of some of the largest U.S. banks.
Longer term, meanwhile, having exposure to large developing markets should afford Scotiabank attractive opportunities and allow it to catch up to its peers, if not overtake them, on key growth metrics. If you can handle some near-term uncertainty, this is a dividend stock worth your attention.
BNS Dividend Yield data by YCharts
Realty Income is a slow and steady giant
There are two bits of bad news for Realty Income right now. The first is that interest rates have risen, which will increase the company's costs. The second is that, given the real estate investment trust's (REIT's) massive size relative to peers (it's about three times as large as its next closest competitor), it simply can't grow all that fast. But with a historically high dividend yield of 5.8% and around three decades of annual dividend increases behind it, most investors will probably be OK with slow and steady growth.
The story is pretty simple: Realty Income buys single-tenant properties for which the tenants are responsible for most property-level operating costs (which is known as a net-lease model). While any single property is high risk, across a large portfolio the risk is very low using this approach. Realty Income owns over 15,000 properties, making it the biggest player in the net-lease space, with a globally diversified portfolio. That scale comes with advantages, including improved access to capital and the ability to take on deals too large for smaller peers, and it eases the way for Realty Income to play the role of industry consolidator (it has acquired two peers in recent years).
But being big isn't all good, as noted above. Realty Income has to make a lot of deals to keep growing. It is harder to grow the company than it would be if it had a smaller portfolio. But you have to juxtapose that against the benefits, like advantaged access to capital, which means Realty Income can more easily invest for growth during difficult times, like the recent rising interest rate environment. All in, the risk/reward balance seems pretty attractive when you add in the historically high dividend yield. Conservative investors shouldn't let this high yield go to waste.
Act while the opportunity is still there
The problem with buying high-yield stocks like Scotiabank and Realty Income is that their yields are high for a reason. However, if you are a long-term investor, the opportunity to own this pair of well-run companies is likely to be worth the near-term uncertainty their businesses are facing. Indeed, this is a chance to buy great companies with high yields that you can lock in for decades to come. Don't let this opportunity pass you by.
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Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
