BAM - 3 Dividend Stocks The Richest Man In American History Might Have Loved

2023-10-23 07:05:00 ET

Summary

• Dividend growth stocks, particularly REITs and utilities, have been slumping due to rising long-term interest rates.
• The richest man in American history was a big believer in the power of dividends.
• We share three once-in-a-decade opportunities to buy elite high-yielding dividend growth stocks at compelling discounts.

Thanks to rapidly rising long-term interest rates, the dividend growth stocks ( SCHD ) have been slumping lately:

In particular, REITs ( VNQ ) and utilities ( XLU ) have been getting hammered:

With dividend stocks crashing, interest rates soaring, and geopolitical instability and uncertainty raging, should investors dump dividend stocks in favor of cash, or should they take advantage of the discounted prices in dividend stocks?

In this article, we are going to hear from the richest man in American history and then share some great once-in-a-decade investment opportunities for investors to take advantage of.

The Richest Man In American History Was A Passionate Dividend Investor

Many investors - in a desire to try to time the market and follow the current trend - are selling their dividend stocks and buying short-term treasuries ( SGOV ) right now in order to guard against further declines in stocks while generating an attractive interest rate on their cash. The logic goes that once it becomes clear that the Federal Reserve is ready to pivot towards cutting interest rates, they will then take their cash and buy back into stocks.

However, this is much more difficult to accomplish than it sounds because the Federal Reserve could potentially pivot at any time and there is a very real chance that the market will rally before the Fed makes any formal announcement given that other factors may drive a rally in stocks, a decline in interest rates, and/or the market may simply decide that - based on income economic data and how far dividend stock prices have fallen - these investments are too discounted and need to be bid up higher.

Moreover, it is important to keep in mind that - as long-term investors - our primary goal is not to try to time the market, but rather to maximize our time in the market. The long-term compounding effects of dividend investing are extremely powerful and well-documented . In fact, the richest man in American history adjusting for inflation - John D. Rockefeller, whose fortune was estimated at being over $400 billion in today's dollars - was a passionate dividend investor and realized that dividends have enormous power to generate long-term wealth. He recognized the virtues of receiving consistent dividend income regardless of what else was going on in the economy and markets when he stated:

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.

Dividend growth investing takes this to an even higher level as the compounding effect is doubled. Instead of merely receiving stable dividend income and reinvesting it each quarter, dividend growth investors receive more cash per share year after year, combining with their ever-increasing share count from reinvested dividends to generate rapidly growing dividend income.

A classic example of the virtues of remaining invested through thick and thin is displayed by Realty Income ( O ):

As you can see from the chart above, there were numerous times over the course of O's history when the stock price crashed by a significant amount. However, through it all, O's underlying cash flow performance and dividend growth were remarkably consistent and strong. As a result, investors who blocked out the market noise, remained invested, and used their dividends to buy additional shares of O stock whenever its price fell significantly, reaped enormous long-term benefits. Not only did they grow their dividend income by increasing their current share count, but they set themselves up for continued dividend per share growth each year while total returns also continued to soar higher.

As a result, we think that - for investors who do not need to liquidate their investments for several years at least - the current sell-off in dividend stocks provides them with several once-in-a-decade opportunities to buy truly great dividend growth stocks at very compelling prices. Here are three of them:

#1. Realty Income Stock ( O )

O is the gold standard of blue-chip triple net lease REITs and represents an exceptional opportunity for long-term-oriented dividend growth investors right now.

O has built a very strong portfolio of triple net lease assets that can withstand economic downturns and e-commerce headwinds as 92% of its current rent comes from tenants that are classified as recession and/or e-commerce-resistant. As a result, even during challenging times like the 2008-2010 recession, the COVID-19 lockdowns, and the commercial real estate downturn of recent years, O's occupancy rates have remained consistently in the high 90s.

Moreover, A's balance sheet is quite strong, thanks to its industry-leading A- credit rating, very reasonable leverage ratio of 5.3x, and well-laddered debt maturities.

Finally, its 6.2% dividend yield, clear path to consistent dividend growth each year, and ~15% discount to its underlying net asset value provide investors with attractive total return potential alongside a very low-risk profile.

#2. Brookfield Infrastructure Partners Stock ( BIP )

BIP is a major player in global infrastructure, focusing on critical networks like energy, water, freight, passengers, and data, and generates stable cash flows and strong profitability.

BIP's utility sector covers 62,000 kilometers of electricity lines and 4,200 kilometers of gas pipelines, serving 10.5 million customers with 7.9 million connections. In transportation, they manage 32,300 kilometers of rail and 3,300 kilometers of toll roads. They also run ten terminals and two export facilities. In the midstream sector, BIP controls 25,600 kilometers of pipelines, significant natural gas storage (565 BCF), and gas processing capacity (5.7 bcf/d). In data, BIP has 209,000 telecom towers, semiconductor foundries, 35,000 kilometers of fiber optic cable, 940,000 fiber-to-the-premise connections, and over 70 data centers.

What makes BIP appealing is its global reach, which reduces region-specific risks and allows for capitalizing on market variations between different economies. Their opportunistic capital recycling program - with assistance from the significant deal flow that they receive from their parent Brookfield ( BN )( BAM ) - helps drive their strong per-share growth rate over time by accelerating the compounding process.

Despite recent stock dips, it has massively outperformed the S&P 500 ( SPY ) in total returns over the long term and maintained an 8% distribution per unit CAGR over 14 years:

With a robust balance sheet that is almost entirely made up of non-recourse debt and enjoys strong liquidity and well-laddered debt maturities, a BBB+ credit rating, and strong long-term growth potential due to the strong and growing demand for infrastructure assets across the world, BIP is well-suited for the current interest rate environment. This - combined with its conservative payout ratio - should enable management to achieve at least the low end of its 6-9% distribution per unit CAGR guidance moving forward. When combined with its extremely attractive distribution yield of over 6.4%, BIP presents investors with a fairly low-risk investment that also holds promise to combine attractive current yield with strong near and long-term growth potential.

#3. Brookfield Renewable Partners Stock (BEP)

Last, but not least, BEP is a global leader in renewable energy production and is a compelling dividend growth investment right now.

It boasts a diversified portfolio of renewable power assets - including hydro, solar, and wind power production assets - spread across five continents. They have a total power asset value of $78 billion and an operating capacity of 25,900 MW, spanning approximately 30 markets in 20 countries. The company commissioned 1,500 MW of development so far this year, with plans to deliver 5,000 MW by year-end. They are also progressing with the construction of around 22,500 MW of development projects, which are expected to generate an FFO of approximately $339 million once completed.

Moreover, 90% of its cash flows come from power purchase agreements with an impressive 14-year average term remaining on them. This provides a secure stream of cash flow and is complemented by its affiliation with over 800 creditworthy global partners, including Amazon ( AMZN ) and A-rated parent Brookfield Corporation. This broad, high-quality counterparty base mitigates risks tied to potential bankruptcies affecting its individual PPAs.

Additionally, BEP is quite resistant to inflation, with approximately 70% of its revenues being tied to inflation. When combined with the fact that they have largely fixed-rate debt, their cash flows are particularly insulated against rising interest rates (since interest rates tend to rise when inflation is high and fall when interest rates fall).

BEP leads the renewable power yield company sector with its BBB+ credit rating, significant liquidity, and well-laddered debt maturities. With fixed interest rates on most of its debt and considerable support from its parent company, BEP stands on a solid financial foundation, poised to invest opportunistically even in challenging economic climates.

Finally, between its impressive growth track record (9.8% AFFO per unit CAGR and 5.6% distribution per unit CAGR since 2011), 6.6% current yield, and robust growth outlook (10.9% AFFO per unit CAGR and 5.6% distribution per unit CAGR through 2027 expected by Wall Street analysts), BEP offers investors compelling risk-adjusted total return potential from a truly elite dividend growth stock.

Investor Takeaway

John D. Rockefeller knew that seeing dividends come in was the truest proof of the intrinsic value of his investments and that owning reliable dividend-paying stocks over the long term was a fantastic way to get and stay rich.

Rising interest rates and crashing stock prices may rattle an investor's emotions and tempt them to try to time the market by selling stocks today in order to avoid further declines and then buy back in when things look better. However, this is extremely hard to do properly on a consistent basis due to so many unknown variables and the potential for the market to soar higher at any moment. As history has shown repeatedly, it is hard to lose over the long term when emphasizing maximizing time in the market while holding a diversified portfolio of high-quality dividend growth stocks.

In O, BIP, and BEP, investors have the chance to buy three extremely high-quality dividend growth stocks at very attractive current yields and in so doing experience the same pleasure that the richest man in American history felt while seeing his dividends come in.

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