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2 Top Dividend Stocks Yielding 5or Moreto Buy Right Nowfor Passive Income The Motley Fool

2 Top Dividend Stocks Yielding 5% or More to Buy Right Now

In the world of investing, dividend stocks have long been a favorite among income-focused investors. They offer the dual benefit of regular cash payouts and the potential for capital appreciation over time. With interest rates fluctuating and market volatility persisting, high-yield dividend stocks can provide a reliable income stream and act as a buffer against economic uncertainties. Today, we're diving into two standout dividend stocks that are currently yielding 5% or more. These aren't just any high-yielders; they're companies with strong fundamentals, proven track records of dividend payments, and promising growth prospects. Whether you're a retiree seeking steady income or a long-term investor building a portfolio, these picks could be worth considering right now. Let's break them down one by one, exploring their businesses, financial health, dividend histories, and why they stand out in today's market.

First Pick: Realty Income (O)

Our first recommendation is Realty Income Corporation (NYSE: O), often dubbed "The Monthly Dividend Company." This real estate investment trust (REIT) specializes in owning and managing a diversified portfolio of commercial properties, primarily leased to retail and service-oriented tenants. Think big-box stores, convenience stores, pharmacies, and even some industrial spaces. Realty Income's business model is built on long-term, triple-net leases, where tenants cover most operating expenses like maintenance, insurance, and taxes. This setup minimizes the company's overhead and provides predictable rental income, which in turn supports its generous dividend payouts.

As of the latest data, Realty Income offers a forward dividend yield of around 5.3%, which is particularly attractive in an environment where bond yields are still adjusting post-inflation peaks. The company has an impressive streak of paying monthly dividends without interruption for over 50 years, and it has increased its dividend for 29 consecutive years. This makes it a Dividend Aristocrat in the REIT space, a title reserved for companies that consistently raise payouts over decades. In 2023, Realty Income paid out more than $3 per share in dividends, and with its latest hike, it's on track to continue this trend.

What sets Realty Income apart is its resilience. During the COVID-19 pandemic, when many retail-focused REITs struggled with tenant bankruptcies and rent deferrals, Realty Income maintained a high occupancy rate above 98% and collected nearly all of its rents. This was thanks to its focus on essential, non-discretionary retailers like Dollar General, Walgreens, and 7-Eleven, which remained operational even in lockdowns. Looking ahead, the company is expanding its portfolio through strategic acquisitions. For instance, in recent years, it merged with VEREIT, another REIT, which significantly boosted its scale and diversification. This deal added hundreds of properties and opened doors to new sectors like data centers and gaming properties.

Financially, Realty Income is in solid shape. Its funds from operations (FFO), a key metric for REITs, grew by about 5% year-over-year in the most recent quarter, driven by rent escalations and new investments. The company's balance sheet is conservative, with a debt-to-equity ratio that's manageable and investment-grade credit ratings from major agencies. This financial prudence allows it to weather economic downturns and continue funding dividends even if interest rates rise, potentially increasing borrowing costs.

Of course, no investment is without risks. Realty Income's performance is tied to the broader real estate market and consumer spending. If we see a prolonged recession, some tenants might face challenges, leading to higher vacancy rates. Additionally, rising interest rates could pressure REIT valuations, as they compete with fixed-income alternatives. However, with inflation cooling and potential rate cuts on the horizon, the environment could become more favorable. At its current price, Realty Income trades at a reasonable multiple to its FFO, suggesting it's not overvalued. For investors seeking monthly income and long-term stability, this stock is a compelling buy right now. Over the past decade, it has delivered total returns (including dividends) that have outpaced the S&P 500, proving its worth as a core holding.

Second Pick: Enterprise Products Partners (EPD)

Shifting gears to the energy sector, our second top pick is Enterprise Products Partners L.P. (NYSE: EPD), a master limited partnership (MLP) that operates one of the largest midstream energy infrastructures in North America. Midstream companies like EPD focus on the transportation, storage, and processing of oil, natural gas, and related products, acting as the crucial link between upstream producers and downstream refiners or end-users. EPD's vast network includes over 50,000 miles of pipelines, storage terminals, and fractionation facilities, primarily concentrated in the Gulf Coast region, which is a hub for U.S. energy exports.

EPD currently boasts a distribution yield of approximately 7.2%, making it one of the highest-yielding options in the dividend space without venturing into overly speculative territory. Unlike many high-yield stocks that might cut dividends during tough times, EPD has increased its distribution for 25 consecutive years, even through oil price crashes like those in 2014-2016 and 2020. This consistency stems from its fee-based business model, where revenues are derived from long-term contracts and volume commitments rather than volatile commodity prices. About 85% of its gross operating margin comes from these stable sources, providing a buffer against energy market swings.

In recent years, EPD has benefited from the global energy transition and rising demand for U.S. liquefied natural gas (LNG) exports. The company has invested billions in expanding its export capabilities, including new marine terminals and pipeline connections to feed growing international markets in Europe and Asia. For example, its recent projects in the Permian Basin have enhanced crude oil and natural gas liquids (NGL) takeaway capacity, capitalizing on the shale boom. Financially, EPD reported distributable cash flow (DCF) that covered its distribution by more than 1.6 times in the latest quarter, indicating strong payout sustainability. The company's leverage ratio is conservative at around 3x, and it maintains investment-grade credit ratings, allowing it to fund growth without excessive debt.

One of the appealing aspects of EPD is its tax advantages as an MLP. Investors receive a K-1 form, and distributions are often treated as return of capital, deferring taxes until shares are sold. This can enhance after-tax yields, especially for those in higher brackets. However, MLPs aren't for everyone—tax complexity and potential unrelated business taxable income (UBTI) in IRAs are considerations.

Risks include regulatory changes in the energy sector, such as shifts toward renewables that could reduce demand for fossil fuels over the long term. Geopolitical events, like tensions in the Middle East or changes in U.S. export policies, could also impact operations. That said, EPD's diversified assets and focus on essential infrastructure position it well for the foreseeable future. Natural gas, in particular, is seen as a bridge fuel in the energy transition, and EPD is a leader in NGLs, which are used in everything from plastics to heating.

At current valuations, EPD trades at an enterprise value to EBITDA multiple that's below its historical average, suggesting it's undervalued relative to peers like Kinder Morgan or Energy Transfer. Total returns over the past five years have been robust, driven by distributions and modest unit price appreciation. For income investors willing to tolerate some energy sector volatility, EPD offers a high-yield opportunity with a proven management team focused on unitholder returns.

Why These Stocks Now? A Broader Perspective

Both Realty Income and Enterprise Products Partners exemplify the qualities of top dividend stocks: reliable payouts, strong balance sheets, and businesses resilient to economic cycles. In a market where growth stocks dominate headlines, these income generators provide ballast to a portfolio. With yields above 5%, they outpace inflation and many savings accounts, making them ideal for generating passive income. Investors should consider their overall allocation—perhaps 5-10% in each for diversification—but always align with personal risk tolerance and goals.

Looking ahead, macroeconomic factors like potential Federal Reserve rate cuts could boost these stocks by lowering borrowing costs and making their yields more attractive compared to bonds. Meanwhile, ongoing global energy demands and the stability of essential real estate ensure these companies remain relevant. If you're buying right now, focus on dollar-cost averaging to mitigate short-term volatility. Remember, dividends aren't guaranteed, but the track records here speak volumes. As always, conduct your due diligence or consult a financial advisor before investing.

In summary, Realty Income and Enterprise Products Partners stand out as high-yield dividend champions with the potential to deliver both income and growth. By incorporating them into your strategy, you could build a more robust, income-producing portfolio ready for whatever the market throws next. (Word count: 1,248)

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