this S&P 500 Index Offering investors a meager yield of approximately 1.2%. For dividend investors looking for high yields, this is like walking through a desert with no water.
But don’t despair – there are high-dividend options out there. You just have to take on a little extra uncertainty, and here’s why WP Carey(NYSE:WPC) The yield is as high as 6.5% Toronto TD Bank(NYSE:TD) Offers a 5.2% dividend yield. Here’s why, despite some added risk, both stocks are worth buying and holding for a decade or more.
WP Carey shareholders are facing a dividend cut as 2024 arrives. Many dividend investors will simply exclude companies that cut their dividends from consideration, assuming that the company is struggling or facing some kind of material hardship.
Why else would they cut the dividend? WP Carey’s answer is a strategic business reset.
Image source: Getty Images.
In late 2023, WP Carey made the decision that the office industry was facing such serious problems that it no longer made sense to slowly exit the space, which at the time represented 16% of rents. Instead, net lease real estate investment trusts (REITs) have opted to exit the office space in one fell swoop. (Net leases require tenants to pay most property-level operating costs.) This represents a significant portion of gross rent that would not be lost without a reduction in dividends.
However, the company raised its dividend the quarter after the cut. The dividend has been increased every quarter since, in line with the pace of growth cuts in previous quarters. That’s why I think this is a dividend reset, not a cut.
The move was motivated by strength rather than weakness, and the subsequent dividend increase was actually intended to send a signal to Wall Street. Additionally, exiting the office market gives WP Carey cash to invest in new assets, which the company has already begun doing and will continue to do until 2025 and perhaps 2026.
Investors have every reason to be troubled by WP Carey’s dividend cut. But it’s important to understand that this is a strategic move, with management clearly looking to rebuild 24 years of dividend growth momentum that was broken when the office properties were sold. WP Carey’s yield is attractive compared to the average REIT’s 3.7% yield, and even conservative high-dividend investors may be looking at WP Carey today.
Toronto-Dominion Bank, known as TD Bank, allowed its U.S. operations to be used to launder money. This is a very bad thing and shows that the bank’s internal controls are too lax.
U.S. regulators weren’t happy about this and slapped the company with hefty fines. They also forced TD Bank to upgrade its money laundering controls and imposed asset caps on the bank’s U.S. assets.
None of this is good news, but the asset cap is particularly troubling. Basically, this means that TD Bank’s U.S. business won’t be able to grow until it regains the trust of U.S. regulators.
TD Bank’s large operations in Canada haven’t been affected at all, so the financial giant remains on solid footing. In fact, the company raised its dividend when it reported fourth-quarter earnings earlier this month. This is a statement to dividend investors that despite the headwinds TD Bank faces, they can still rely on TD Bank to be a reliable dividend stock.
That said, 2025 could be a very difficult year for the company and its shareholders. Due to asset caps in the U.S. market, management will make adjustments to its business that will hurt earnings but free up capital to be able to continue serving customers without interruption.
This will reduce revenue. However, it’s unlikely the dividend will increase, considering it’s due to be cut in just a few months.
Note that unlike many U.S. banks, TD Bank made it through the Great Recession without cutting its dividend, so it seems reasonable that it would also survive the U.S. headwinds it’s currently facing. If you can wait for the company to finally regain the trust of regulators, you’ll get a whopping 5.2% dividend yield, backed by dividends that are still growing along the way. That’s not bad considering the average bank yield is only 2.1%.
We have good reason to be unhappy with WP Carey and TD Bank. However, if you can look past the negatives, you’ll find that both companies are financially strong companies capable of paying reliable and growing dividends. You may have to be wary when you hit the buy button, but it may be worth it given both companies’ high yields, still-solid businesses, and recent dividend increases.
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Reuben Gregg Brewer is with Toronto-Dominion Bank and WP Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Two High-Yield Dividend Stocks You Can Buy and Hold for a Decade originally published by The Motley Fool
