It is never too early or too late, and no one is too young to begin investing. I know this, as I began to learn as a small child. I started by learning the basics of how companies issue stock, and how stocks are then bought and sold on the exchanges. And my learning commenced with building a model portfolio that I would paper trade. Each day I would check the stock prices — which way back when were listed in the daily newspapers.
I would go on to open a small brokerage account and work with my own money — all supporting my learning experience. Of course, I would gain and lose along the way.
Back then, commissions were a lot steeper than the discounted — and even free — rates of today. So, my choices were more about what to buy and own. I had to have a high level of confidence to overcome the costs of buying and selling, which meant I had more “buy and own” in my portfolio.
I would later learn and appreciate the power of dividends, which bolstered my portfolio as they were credited to my account. And this appreciation has continued through to today. I remain firmly in favor of focusing on stocks that pay you well through good and rising dividend distributions.
Why Dividends Matter
This is an important lesson. Dividends continue to be one of the biggest sources of overall total return in the stock market. Take for example the performance of the S&P 500 over the trailing 20 years.
The index gained in price by 104%, but with dividends the return swells to 201.4% which is nearly double the price movement alone.
S&P 500 Total Return
That’s a big premium over just investing for price growth. And those dividends worked to cushion returns during bear markets over those same 20 years.
For beginner investors, it’s not just about dividends. Investing should also contribute to learning more about the underlying companies behind the stocks. by investing in the right dividend stocks that are in distinct industries and markets, beginner investors will learn more about how business works.
- Compass Diversified Holdings (NYSE:CODI)
- Hercules Capital (NYSE:HTGC)
- Kinder Morgan (NYSE:KMI)
- NextEra Energy (NYSE:NEE)
- Easterly Government Properties (NYSE:DEA)
I’ve put together a small collection of five stocks that pay dividends that range from close to the average of the S&P 500 to many multiples more. And they are in varied segments ranging from industrial and consumer products, technology, utilities, real estate investment trusts (REITs) and the energy market.
Dividend Stocks: Compass Diversified Holdings (CODI)
Compass Diversified Holdings Total Return
Dividend Yield: 9.5%
I start with Compass Diversified Holdings. This is a holding company which owns a collection of industrial and consumer products companies which it buys, owns and sometimes sells. And along the way, the company collects lots of cash flows from its underlying companies.
In turn, it pays a lion’s share of the profits in the form of a big dividend. It currently yields 9.5%.
And yes, the stock did selloff in March with the dash for cash. But still — over the trailing five years with that ample dividend it has returned 34.4% for an average annual equivalent return of 6.1%.
Hercules Capital (HTGC)
Hercules Capital Total Return
Dividend Yield: 14.2%
Next is Hercules Capital. This is a Silicon Valley-headquartered firm which seeks out new and developing technology companies in its neighborhood and beyond. It works to finance their developments and takes equity participation. Then, Hercules provides guidance in their development, including eventual exit strategies through company sales and initial public offerings (IPOs). It too pays a bigger dividend which currently yields 14.2%.
Hercules is viewed as a financial business lender, not an equity investor. But it’s involved in promising tech companies, including those in biotech, giving it a particular value.
And despite the fall in price in March, it is still positive in return including that dividend income.
Kinder Morgan (KMI)
Kinder Morgan Total Return
Dividend Yield: 7%
Then, we move on to the energy market in the reliable dividend-paying segment of oil and gas pipelines. My pick here is Kinder Morgan. Kinder Morgan owns and operates a massive network of pipeline and related oil and gas infrastructure that is crucial to the petroleum industry in the U.S.
And while oil prices have plunged with skirmishes between OPEC and its allies, petroleum isn’t going away. It’s a must-have for the U.S. and global economies. It generates an increasing amount of revenues and profits which in turn it pays a portion of in a dividend yielding 7%.
Kinder Morgan’s stock got sold off with the general S&P 500 in March, which makes it a particular bargain right now. You can buy the stock right now at a 5% discount to its intrinsic value (book value) which would be very difficult to replicate in its vast pipeline network.
NextEra Energy (NEE)
NextEra Energy Total Return
Dividend Yield: 2.4%
Next is one of the most impressive of U.S. power utility provides — NextEra Energy. This company provides regulated power to customers in Florida. And it also provides unregulated wind and solar-generated power throughout North America and beyond.
This combination of reliable cash flows from its regulated business and growth from the unregulated business has been generating ample gains in the stock price along with a modest dividend yielding 2.4%.
The total return of this defensive utility is impressive over the past five years, running at 159.9% for an average annual equivalent return of 21%.
Easterly Government Properties (DEA)
Easterly Government Properties Total Return
Dividend Yield: 3.9%
Last up is a favorite REIT that is perhaps the most defensive property landlord in the U.S. market. Easterly Government Properties leases properties to the U.S. government.
And while other tenants of REITs are indeed in jeopardy with the current economic lockdowns, the U.S. Department of Treasury will keep cutting rent checks to Easterly. This ensures that the dividends will be paid. And yielding 3.9%, the stock is a good payer in the current market.
Easterly is a good and reliable dividend payer. But it has also generated steady gains over the past five years alone with a total return of 109.9% for an average annual equivalent return running at 16%. And it is a good value. The stock is only valued at 1.9 times its underlying book value of all of those dependable government-leased properties.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.