When it comes to investing for passive income, many investors are drawn to high-yield stocks. After all, who wouldn’t want a steady stream of income flowing into their portfolio? However, a high yield alone isn’t always a good indication of the attractiveness of an income investment. In fact, it can often be a red flag that Wall Street is worried about a company’s future prospects. This is why it’s important for investors to look beyond just dividend yield when evaluating potential income investments.
Two companies that are currently offering attractive yields are Realty Income (NYSE: O) and Toronto-Dominion Bank (NYSE: TD). Let’s take a closer look at these businesses and the factors that back their above-average yields.
Realty Income, a real estate investment trust (REIT), may not be the most exciting stock to talk about, but it offers a hefty 5.5% dividend yield. This is well above the industry average of around 3.9%. The company has a track record of increasing its dividend annually for 30 consecutive years and boasts an investment-grade rated balance sheet. With a portfolio of approximately 15,400 properties spread across North America and Europe, Realty Income is the largest net lease REIT you can buy. While the company’s focus is primarily on retail properties, it also has exposure to industrial assets and unique properties like vineyards and casinos.
The reason for Realty Income’s high yield is its slow and steady growth. Investors can expect low- to mid-single-digit percentage dividend growth, which has been consistent over the past three decades. While this may not be the most exciting growth story, it still offers an attractive return when combined with the dividend yield. With a historical growth rate above inflation, Realty Income is a solid choice for long-term income investors.
On the other hand, Toronto-Dominion Bank, or TD Bank, offers a yield of about 5.2%, more than double the average yield of the banking industry. As the second largest bank in Canada and a top-10 bank in North America, TD Bank has a diversified business model that includes consumer banking, corporate banking, insurance, and investment banking. The company has paid a dividend continuously since 1857, showcasing its commitment to returning value to shareholders.
However, TD Bank has faced challenges with U.S. banking regulators due to money laundering issues. This has resulted in a high yield for the stock, as investors are concerned about the impact of these regulatory issues on the bank’s growth prospects. Despite these challenges, TD Bank remains financially strong, and its Canadian operations are not affected by the U.S. headwinds. For investors willing to wait for the bank to resolve its regulatory issues, TD Bank could be a compelling addition to their portfolio.
In conclusion, when seeking out high-yield stocks for long-term passive income, it’s essential to look beyond just the yield. Companies like Realty Income and TD Bank offer attractive yields backed by strong businesses. Whether it’s a stalwart industry giant like Realty Income or a company facing temporary challenges like TD Bank, these stocks have the potential to provide sustainable income over decades. By focusing on the underlying fundamentals of the business, investors can build a portfolio that generates reliable income for years to come.
