Remember when you could get a 5% yield on a CD?
Ah, those were the good old days. Today, you’d be lucky to get 5% on a relatively safe “high-yield†junk bond with a 10-year maturity, let alone something creditworthy and with a shorter duration. And yes, these days it is regrettably necessary to put quotation marks around “high-yield.â€
But despite the lack of yield in the bond market, you can still find a respectably high yield among dividend stocks.
Sure, when choosing high-dividend stocks over bonds you have a little more volatility to contend with. And stock dividends — unlike bond interest — can be cut by a company’s board of directors with no warning and with no legal liability.
But if my options are to accept a “risk-free†2% in government bonds, a risky 5% in junk bonds, or an only modestly risky 5% or more in dividend stocks, the choice is pretty clear. And when you add dividend growth into the mix, dividend stocks are a no-brainer for investors hunting for income.
Today, I’m going to highlight five solid dividend stocks with high yields of 5% or more.
HCP, Inc. (NYSE:HCP)
I’ll start with HCP, Inc. (HCP), a blue-chip REIT included in both the S&P 500 Index (SPY) and the Dividend Aristocrats Index following its 30 consecutive years of dividend hikes. At current prices, HCP pays a very competitive 5.1%.
HCP is backed by some very attractive long-term demographic trends, most notably the aging of the Baby Boomers. At 37%, senior housing makes up the largest segment of HCP’s portfolio, followed by post-acute facilities at 31%. Life sciences, medical offices and hospitals fill out the rest of the portfolio at 14%, 13% and 5%, respectively.
HCP is by no means a sexy stock. In fact, it’s about as boring as they come. But that boring predictability is precisely what makes HCP so attractive as a dividend stock. Over the past 10 years, HCP has grown its dividend at a 4% annual clip, a rate I consider reasonable going forward.
Between the current dividend yield above 5% and the growth rate of 4%, investors in HCP can expect something in the ballpark of 9%-10% annual returns going forward. That’s not amazing … but it certainly isn’t bad in this market.
If possible, it’s a good idea to hold HCN in an IRA or Roth IRA because REIT dividends are not always taxed at the more favorable 15%-20% qualified dividend rate. In the quirky world that is REIT taxation, some of a REIT’s dividend may be considered a tax-free return of capital, but most of the dividend will be taxed as ordinary income at the investor’s highest marginal rate. So as a general rule, it’s good to hold REITs in a tax-advantaged account like an IRA or Roth IRA.
