For dividend investors, there's usually nothing more tempting than a big, fat dividend yield. But you have to make sure that the business behind that yield is strong enough to keep paying the dividend or you could end up owning a yield trap. Right now Wall Street is sour on W.P. Carey(NYSE: WPC), T. Rowe Price(NASDAQ: TROW), and Toronto-Dominion Bank(NYSE: TD). But that's put these financially strong dividend stocks on sale for investors willing to look deeper into a high-yield story.
1. W.P. Carey is a dividend resetter, not a dividend cutter
As 2024 got underway W.P. Carey cut its dividend. That's the bad news, but there's an important backstory. For years the real estate investment trust (REIT) had been shrinking its office property holdings. But after the coronavirus pandemic, management realized that the office segment was becoming a bigger problem. It chose to jettison its office assets in one fell swoop. At 16% of rents, that was too large a shift to make without trimming the dividend accordingly. The quarter after the cut it started raising the dividend, getting back to the quarterly increase cadence it had long followed. It was a sign that this was a strategic reset, not a sign of weakness.
But Wall Street is basically taking a show-me attitude with W.P. Carey. Its dividend yield is roughly 5.6% compared to a REIT average of about 3.7%, using the Vanguard Real Estate Index ETF as a proxy. W.P. Carey's balance sheet is investment grade rated and, perhaps more important, it is sitting on a record level of liquidity after the office divestment. That means it is likely on the verge of buying new properties to drive growth.
2. T. Rowe Price isn't going anywhere
T. Rowe Price is a large and well-respected asset manager. Asset management is an interesting business for several reasons. First, asset managers get paid fees to manage other peoples' money, which makes assets under management (AUM) a vital piece of information. T. Rowe Price ended the second quarter of 2024 with $1.57 trillion in AUM, up 12.1% from the prior year. But market fluctuations generally only affect asset inflows and outflows at the margins. There are two takeaways from this. First, the top and bottom lines will fluctuate along with the market. Second, assets are actually pretty stable, making T. Rowe Price's business a reliable cash generator.
Wall Street, however, is worried that the mutual fund business, which is a big one for T. Rowe Price, is losing ground to exchange-traded funds (ETFs). This is true, but mutual fund assets are still relatively stable, so T. Rowe Price's business isn't falling off a cliff. And the company is expanding into areas that are growing, including ETFs. So it is changing with the times. Also important, T. Rowe Price has no long-term debt, so it is an incredibly strong company, financially speaking. That helps explain the 38 consecutive annual dividend increases. Now add in a historically high 4.6% dividend yield. If you are willing to give an out-of-favor, but reliable, dividend payer the benefit of the doubt while Wall Street has put it on the sale rack, T. Rowe Price could be for you.
3. Toronto-Dominion Bank messed up
There's no point mincing words: Toronto-Dominion Bank's money laundering controls failed. It is now dealing with the fallout from this, which has included canceling a planned acquisition, terrible news headlines, investing in upgraded internal controls, and having to set aside roughly $3 billion for fines and legal costs. Management, however, is confident it will be able to put the worst of this issue behind it by the end of 2024. The lingering problem is that growth plans in the U.S. market could be on hold until TD Bank, as the bank is more commonly known, earns back investor and regulator trust.
That said, TD Bank's 4.7% dividend yield is near historic highs right now, reflecting the negative news. For investors who think in decades and not days, this is likely an opportunity to own a historically successful bank. Note, for example, that TD Bank has paid uninterrupted dividends since 1857! And while its U.S. business is facing headwinds, its larger and still dominant Canadian operation isn't (TD Bank is the second largest bank in Canada by assets). It may take a few years to move beyond the money laundering mess, but given the long history of success here, most dividend investors will probably benefit from buying while others are fearful.
A few warts, but lots of reliable dividends
It's true that W.P. Carey, T. Rowe Price, and TD Bank all have some negatives that come along with their high yields. However, when you dig into each company's story just a little further, you find that the dividends are well supported by each business. If you can think long-term while most other investors are worried about the short term, it might make sense to pick up one, or more, of these high-yield financials as October gets underway.
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Reuben Gregg Brewer has positions in Toronto-Dominion Bank and W.P. Carey. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.
