Many companies pay dividends. However, some dividend stocks are better suited for investors seeking income than others because of the durability of their cash flows and the strength of their financial profiles. Those features enable them to pay attractive dividends that steadily grow, even through more challenging periods.
NextEra Energy (NYSE: NEE) and Realty Income (NYSE: O) are two such dividend stocks. They've grown their dividends for 30 straight years, which includes three major economic downturns. That growth should continue in the future, even if we have more economic turbulence. Because of that, they're no-brainer income stocks to buy this May.
High-powered dividend growth
NextEra Energy has done an amazing job of growing its dividend over the years. The utility has increased its payout for more than 30 straight years. It has grown its dividend at a rather brisk 10% compound annual rate over the past two decades. That's much faster than the average utility and the S&P 500 (SNPINDEX: ^GSPC).
A few factors have contributed to its strong dividend growth. The company's businesses, a Florida-based electric utility (FPL) and a power generation and transmission platform (NextEra Energy Resources), generate very stable earnings backed by government-regulated rate structures and long-term, fixed-rate contracts. That gives it the stable cash flow to pay a lucrative dividend (nearly 3.5% current yield, compared to less than 1.5% for the S&P 500) and invest in growing its businesses. NextEra also has a strong balance sheet, which gives it additional financial flexibility.
NextEra's businesses also have built-in growth drivers. Florida's power demand is rising as the population grows, and sunshine is abundant for producing low-cost solar energy. Meanwhile, demand for renewable energy is surging, driving robust growth opportunities for its energy resources segment.
Given the growing demand for power, especially from renewable sources, NextEra expects to continue growing at a healthy rate (at or near the high end of its 6% to 8% annual guidance range through at least 2027). That growth rate and a lower dividend payout ratio for a utility should support continued dividend growth of around 10% per year through at least next year.
Built to pay a growing dividend
Realty Income has a terrific track record of growing its dividend. The real estate investment trust (REIT) has raised its dividend 130 times since it went public in 1994. It currently has dividend growth streaks of 110 straight quarters and 30 consecutive years. The company has grown its payout at a 4.3% compound annual rate over the past three decades.
The REIT collects very stable rental income. It owns a diversified portfolio of properties (retail, industrial, gaming, and others) across the U.S. and Europe, secured by long-term net leases. Net leases produce very stable cash flow because tenants cover all operating costs, including routine maintenance, real estate taxes, and building insurance.
Realty Income owns properties leased to many of the world's leading companies, including 7-Eleven, Home Depot, and Walmart. It focuses on leasing properties to tenants in economically resilient industries that are relatively immune to the impacts of e-commerce (91% of its annual base rent).
Realty Income has a low dividend payout ratio for a REIT, which enables it to retain significant excess free cash flow to invest in new income-producing real estate (over $900 million last year). The company also has one of the highest credit ratings in the REIT sector, which gives it additional financial flexibility to acquire income-producing commercial real estate.
The company's financial flexibility enables it to invest billions of dollars each year into new income-generating properties. That helps support the steady growth in its more than 5.5%-yielding dividend.
No-brainer income stocks
NextEra Energy and Realty Income pay dividends that investors can bank on. The companies generate very steady cash flow, which enables them to pay lucrative dividends and invest in growing their businesses. Those growth investments have helped them to steadily increase their dividends over the past few decades.
With durable businesses and strong balance sheets, they should be able to continue raising their payments in the future. Because of that, investors seeking income can buy them without hesitation this month.
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Matt DiLallo has positions in Home Depot, NextEra Energy, and Realty Income. The Motley Fool has positions in and recommends Home Depot, NextEra Energy, Realty Income, and Walmart. The Motley Fool has a disclosure policy.
