Dividend stocks are an excellent way to generate passive income. These stocks tend to produce solid returns with less volatility.
According to one study by Hartford Funds, 69% of the S&P 500 index's returns since 1960 are from reinvested dividends that compounded over time. And companies that have initiated or raised their dividends have outperformed an equal-weighted S&P 500 index since 1973, returning 10.2% versus 7.7% annually, with less volatility.
Companies that consistently increase dividends tend to have strong businesses with stable growth, good balance-sheet management, and a commitment to returning capital to shareholders. Two companies that have raised dividends for three decades or more are Realty Income (NYSE: O) and Cincinnati Financial(NASDAQ: CINF). Here's how these companies have accomplished this feat and why they can be excellent all-weather dividend stocks for your portfolio.
1. Realty Income has increased its dividend for 30 consecutive years
Realty Income is a real estate investment trust (REIT) that operates over 12,000 properties around the world. As a REIT, the company must distribute 90% of its taxable income (excluding net capital gains) as dividends to shareholders.
Because of this tax structure, REITs can deliver high dividend yields, and Realty Income's dividend currently yields more than 5%. The company, which pays its dividend monthly, must produce strong, steady cash flows to maintain and boost its dividend. To do so, it uses something called triple-net leases.
With this type of lease, tenants must pay all of the expenses related to the property, including property taxes, insurance, and maintenance. These agreements are common in commercial real estate, require fewer costs and less management from the landlord, and provide a consistent revenue stream. In return, tenants have control over the property and pay cheaper rent than a standard lease agreement.
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Realty Income leases to various clients, with 82% of its annual rent coming from the retail sector. This exposes it to risks during an economic slowdown or recession, which could result in a decline in its tenants' earnings that could affect their ability to pay rent.
Realty Income keeps a diversified portfolio across companies and geographies to mitigate this risk. Its largest client, Dollar General, makes up just 4% of its annualized rent. Meanwhile, two regions each account for 10.3% of its annual rent, Texas and the U.K.
The stock has taken a hit and is down 20% from its 52-week high after being caught up in broader selling among REITs. However, many of Realty Income's tenants are recession-resistant, including grocery stores, dollar stores, and convenience stores, so it should hold up well regardless of what the economy does.
The recent sell-off, and its 30-year record of raising dividends, make Realty Income a solid all-weather dividend stock you can buy and hold for the long term.
2. Cincinnati Financial has increased its dividend for 63 consecutive years
Cincinnati Financial is another solid all-weather dividend stock because of its steady, consistent business. It writes insurance policies providing property and casualty coverage for individuals and businesses.
Insurers can generate consistent cash flows because their products will always be in demand, and sales volume tends to grow along with economic growth and inflation. It's vital that insurers consistently write profitable policies; otherwise, claims will eat into profits and affect their ability to deliver returns to investors.
Cincinnati Financial's underwriting ability has achieved industry-beating profitability over the past 21 years. This includes a rough period for the business from 2008 to 2011 during which the insurer still raised its payout (albeit modestly) to maintain its long history of dividend increases. This is a testament to the company's balance sheet and commitment to delivering dividends to its shareholders.
Cincinnati Financial has increased its dividend in the past nine recessions, and its yield is currently just north of 3%. The nature of the insurance industry and the company's ability to consistently deliver underwriting profits make it another solid all-weather dividend stock you can hold for the long haul.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool recommends Realty Income. The Motley Fool has a disclosure policy.
