If you are an income investor looking at the S&P 500‘s miserly 1.3% dividend yield and feeling glum, don’t despair. You can find attractive higher-yielding stocks if you look hard enough. The list today includes W.P. Carey (NYSE: WPC) and its 5.5% yield and Bank of Nova Scotia (NYSE: BNS) and its 6% yield. Although both come with some warts, they are still the kinds of stocks that you can buy and hold for a decade (or more!). Here’s a quick look at each one.
Why you should consider buying dividend cutter W.P. Carey
How can a company that just cut its dividend at the start of 2024, even though it has a hefty 5.5% yield, be the type of stock any dividend investor would want to own? It is important to understand why this real estate investment trust (REIT) cut its dividend.
For many years W.P. Carey had been reducing its exposure to office properties, which were a part of its highly diversified net lease portfolio (a net lease requires tenants to pay most property-level operating costs). But after the pandemic lockdowns ended management came to the conclusion that a rapid exit was in the best long-term interest of the business and its shareholders. So it ripped the bandage off. But office represented 16% of rents. That was just too large a piece of the rental pie to eliminate without trimming the dividend.
There are two interesting things to consider. First, W.P. Carey has already gotten back into its normal cadence of quarterly dividend increases. Clearly, the cut was related to the office exit, not some terrible fundamental problem. Second, the office exit has left W.P. Carey’s liquidity at an all-time high. That means it has a pile of cash to invest that will help to spur long-term growth. So the cut was a hard pill to swallow, but it has set W.P. Carey up for a brighter future. The risk here seems fairly minimal while the potential rewards are already high and likely to go even higher.
Why has Bank of Nova Scotia hit the pause button on dividend growth?
Bank of Nova Scotia, normally just called Scotiabank, didn’t cut its dividend. However, it has stopped increasing the dividend for at least a year. Most long-term dividend investors will recognize that this can be a sign of trouble at dividend-paying companies. So what’s going on? Scotiabank is dealing with a business revamp.
Historically, large Canadian banks like Scotiabank have opted to expand into the U.S. But Scotiabank went down a different path, expanding in Latin America. The logic was sound, given that the region has less competition and is filled with emerging economies that offer greater growth prospects than mature ones like the U.S. But Latin America hasn’t been a big win, thanks to the higher risks inherent in emerging markets. Scotiabank has trailed its peers on key metrics like earnings growth, non-interest revenue growth, and return on equity.
The company has taken a good look at its geographic exposure and decided it needs to shift gears, which will be a multiyear effort. The dividend pause is intended to give management the breathing room to make changes. The big moves are going to be the exit of less desirable markets (Colombia) and a renewed focus on more desirable ones (Mexico and the U.S.). To this end, it has already announced plans to buy nearly 15% of Keycorp (NYSE: KEY).
The goal is to create a North American banking giant, which is more in line with what its peers are doing. If that sounds reasonable to you, then the bank’s hefty 6% dividend yield will probably be worth a deep dive. Note, also, that Scotiabank has paid a dividend every year since 1833, so this is not some fly-by-night bank.
More yield, not that much more risk
With the market’s yield so low, finding ultra-high-yield dividend stocks is likely to require taking on some added risk. The key for investors is to find a balance between yield and risk that is favorable and likely being misjudged by the market. That’s exactly the case with dividend cutter W.P. Carey, which has set itself up for faster growth in the future. It’s also the case for Bank of Nova Scotia, which is taking a breather so it can revamp the business. Either one would likely be a good long-term addition to most dividend portfolios.
Should you invest $1,000 in W.P. Carey right now?
Before you buy stock in W.P. Carey, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and W.P. Carey wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $722,320!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns as of September 16, 2024
Reuben Gregg Brewer has positions in Bank Of Nova Scotia and W.P. Carey. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
2 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade was originally published by The Motley Fool
