The stock market is hovering near all-time highs. That has pushed the dividend yield on the S&P 500 Index (SNPINDEX: ^GSPC) down to a paltry 1.2%, which is not an attractive number if you are a dividend investor. But you can generate yields of 5% or more with Realty Income (NYSE: O) and Toronto-Dominion Bank (NYSE: TD). They are two of my top high-yield stock picks right now. Just keep in mind that there’s a barbell here on the risk spectrum.
Realty Income: A low-risk income stream
Realty Income is offering a dividend yield of roughly 5.1%. That’s not only attractive relative to the broader market, it is also notably above the 3.7% yield of the average real estate investment trust (REIT). It’s worth noting that the monthly pay dividend has been increased annually for 29 consecutive years.
What, exactly, does Realty Income do? It is what is known as a net lease REIT. Net lease REITs generally rent out single-tenant properties and require the tenant to pay for most property-level operating costs. While any single property is high-risk, across a large enough portfolio, this is actually a very low-risk investment approach. Realty Income is the largest net lease REIT, with a market cap of a bit over $50 billion and a portfolio that includes over 15,400 properties spread across North America and Europe.
Being so large and diversified, along with the fact that Realty Income has an investment grade rated balance sheet, gives the REIT advantaged access to capital markets. That allows this industry giant to compete aggressively for deals and still make a profit. That said, given the company’s size, it’s likely to be a slow and steady grower over time. But if you’re looking for a foundational holding for your high-yield portfolio, low-risk Realty Income is a name you should get to know very well.
2. Toronto-Dominion Bank: Buy while it’s in the doghouse
The headlines are currently filled with bad news about Toronto-Dominion Bank, which is usually just referred to as TD Bank. It has been fined roughly $3.1 billion for failing to stop its U.S. division from being used to launder money. TD Bank is also going to be heavily monitored by regulators for an indefinite period of time until it regains regulator trust. During that monitoring, TD Bank basically won’t be able to grow its U.S. business (this is called an asset cap). None of this is good news, and TD Bank’s shares have logically fallen. The dividend yield is currently around 5.2%, which is historically high for the company.
Hold your nose and buy TD Bank anyway. Why? First, the effect is only on its U.S. business. The bank’s core Canadian operations are performing just fine and aren’t encumbered in any way. TD Bank is the second largest bank in Canada by deposits and, given the heavy regulation in the country, it has a protected market position. The effect of this fine and the heightened scrutiny in the U.S. market is not going to lead to the demise of TD Bank.
Second, assuming you believe that TD Bank can muddle through this problem, it will eventually start to grow again. Notably, it has already set aside the cash needed to pay the fine, and it has already started the process of upgrading its internal controls. Sure, TD Bank has noted that 2025 will be a transition year in which it has to manage its U.S. business differently. But that’s a temporary headwind that will actually set the company up for long-term success, because it entails a shift toward higher-quality assets. When it has regained regulator trust, U.S. growth will resume from a stronger foundation.
By that point, however, the opportunity to buy this high-quality Canadian bank will likely be gone. That’s why now, during the worst of the headlines, is the time to step aboard. You probably have a little time to buy it, or to add to an existing position, but if you wait too long you could miss this opportunity to own a fairly low-risk turnaround play. While really conservative investors might want to avoid the headline risk of TD Bank, most should feel pretty comfortable buying it and collecting a fat dividend yield while waiting for better days to arrive.
Two high-yield options well worth considering
Realty Income is a “play it safe” investment. TD Bank is a higher-risk choice, but only because of the negative headlines now swirling around the bank. Both offer yields that are well above the level of the average stock. And if you put them both together, well, you get an interesting risk barbell that creates what is really just a moderate-risk high-yield two-stock portfolio.
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Reuben Gregg Brewer has positions in Realty Income and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Realty Income and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
Here Are My Top 2 High-Yield Stocks to Buy Now was originally published by The Motley Fool
