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2 Dividend Stocks to Double Up on Right Now | The Motley Fool

2 Dividend Stocks to Double Up on Right Now

In the ever-evolving landscape of investing, dividend stocks remain a cornerstone for those seeking steady income and long-term growth. As we navigate through economic uncertainties, including inflation pressures, interest rate fluctuations, and geopolitical tensions, it's crucial to identify companies that not only pay reliable dividends but also have the potential for capital appreciation. Today, we're diving deep into two standout dividend stocks that savvy investors should consider doubling up on immediately. These picks are based on their strong fundamentals, resilient business models, and attractive yields in the current market environment. Whether you're a seasoned investor or just starting to build your portfolio, these stocks offer a compelling mix of stability and upside potential.

Why Focus on Dividend Stocks Now?

Before we get into the specifics, let's set the stage. Dividend stocks have historically outperformed non-dividend-paying stocks over the long haul, especially during volatile periods. According to data from various financial studies, companies that consistently pay and grow dividends tend to deliver superior total returns. This is because dividends provide a tangible return on investment, acting as a buffer against market downturns. In today's climate, with the S&P 500 trading at elevated valuations and recession fears lingering, dividend aristocrats—those with a track record of increasing payouts—become even more appealing.

Moreover, the Federal Reserve's recent signals on interest rates suggest a potential easing cycle, which could benefit dividend-paying sectors like real estate, utilities, and consumer staples. However, not all dividend stocks are created equal. We need to look for those with sustainable payout ratios, strong free cash flow generation, and moats that protect their market positions. The two stocks we're highlighting today fit this bill perfectly: Realty Income Corporation (NYSE: O) and AbbVie Inc. (NYSE: ABBV). Both have proven their mettle through economic cycles and are poised for continued success.

Realty Income Corporation: The Monthly Dividend Machine

First up is Realty Income, often dubbed "The Monthly Dividend Company." This real estate investment trust (REIT) specializes in single-tenant, freestanding retail properties leased to creditworthy tenants like Walgreens, Dollar General, and FedEx. What makes Realty Income a must-have for dividend enthusiasts is its unwavering commitment to monthly payouts—a rarity in the stock market. As of mid-2024, the company boasts a dividend yield of around 5.5%, significantly higher than the S&P 500 average of about 1.3%.

Realty Income's business model is built on resilience. By focusing on essential retail and service-oriented tenants, the company ensures high occupancy rates, typically above 98%. These leases are often triple-net, meaning tenants cover property taxes, insurance, and maintenance, which minimizes Realty Income's operational risks and costs. This structure has allowed the company to weather economic storms, including the 2008 financial crisis and the COVID-19 pandemic, without missing a dividend payment.

Diving deeper into the numbers, Realty Income has increased its dividend for 30 consecutive years, earning it Dividend Aristocrat status. The current annual dividend is approximately $3.16 per share, with a payout ratio of about 75% of adjusted funds from operations (AFFO), leaving room for future growth. In its latest earnings report, the company reported a 3.5% year-over-year increase in AFFO, driven by strategic acquisitions and rent escalations.

But it's not just about the dividends—Realty Income is also a growth story. The company has been aggressively expanding its portfolio, recently venturing into data centers and industrial properties to diversify beyond retail. For instance, its partnership with Digital Realty to acquire data center assets positions it well in the booming AI and cloud computing sectors. Analysts project earnings growth of 4-6% annually over the next five years, supported by a robust pipeline of over $10 billion in potential acquisitions.

Why double up now? Shares are trading at a discount to their historical price-to-AFFO multiple, making it an opportune time to buy. With e-commerce growth stabilizing and physical retail rebounding, Realty Income's properties are more relevant than ever. If interest rates decline as expected, REITs like this one could see a valuation re-rating, potentially leading to 10-15% upside in share price over the next 12 months, on top of the juicy yield.

Of course, risks exist. A prolonged economic downturn could pressure retail tenants, leading to higher vacancies. However, Realty Income's diversified tenant base and conservative leverage (debt-to-EBITDA around 5x) provide a safety net. For income-focused investors, this stock is like a high-yield bond with equity upside—perfect for doubling your position while the market is undervaluing it.

AbbVie Inc.: Biotech Powerhouse with a Growing Payout

Shifting gears to the healthcare sector, AbbVie stands out as a dividend stock with both defensive qualities and innovative growth drivers. Formed as a spin-off from Abbott Laboratories in 2013, AbbVie has transformed into a biopharmaceutical giant, best known for its blockbuster drug Humira, which treats autoimmune diseases. Despite Humira facing biosimilar competition since 2023, AbbVie has masterfully navigated this challenge through a diversified pipeline and strategic acquisitions.

AbbVie's dividend yield currently hovers around 3.5%, backed by 52 consecutive years of increases (including its time under Abbott). This makes it a Dividend King, a title reserved for companies with at least 50 years of payout growth. The annual dividend is about $6.20 per share, with a payout ratio of roughly 50% of earnings, indicating ample room for future hikes. In fact, management has guided for high-single-digit dividend growth annually.

What fuels this reliability? AbbVie's revenue streams are robust and recurring. Post-Humira, drugs like Rinvoq and Skyrizi in immunology, along with Vraylar in neuroscience and Imbruvica in oncology, are driving top-line growth. In the most recent quarter, revenue jumped 4.3% to $14.5 billion, with Rinvoq and Skyrizi posting double-digit gains. The company's aesthetics business, bolstered by Botox, adds another layer of stability, as demand for cosmetic treatments remains resilient even in tough economies.

AbbVie's growth prospects are particularly exciting. The company is investing heavily in research and development, with a pipeline including over 90 programs. Key catalysts include the potential approval of new indications for existing drugs and acquisitions like the $8.7 billion purchase of Cerevel Therapeutics, which strengthens its neuroscience portfolio. Analysts forecast earnings per share growth of 5-7% annually through 2028, supported by margin expansion and share buybacks.

Why is now the time to double up? AbbVie's stock has been under pressure due to Humira erosion concerns, trading at a forward P/E of about 12x—well below the sector average of 18x. This creates a buying opportunity, especially as biosimilar impacts are already priced in, and new drugs ramp up. Healthcare stocks often shine during market volatility, providing a hedge against broader economic woes. With an aging global population and rising demand for innovative therapies, AbbVie's moat in biologics and specialty drugs positions it for sustained outperformance.

Risks include regulatory hurdles, patent cliffs, and competition in crowded therapeutic areas. However, AbbVie's strong balance sheet (net debt of about $50 billion but with solid cash flows) and experienced management mitigate these. For investors, this means a reliable dividend stream plus potential for 15-20% total returns annually if the stock reverts to its historical valuation.

Putting It All Together: A Balanced Dividend Strategy

In summary, Realty Income and AbbVie represent two pillars of a strong dividend portfolio. Realty Income offers high yield and monthly income from essential real estate, while AbbVie provides growth-oriented dividends from cutting-edge healthcare innovations. Together, they diversify across sectors—real estate and pharma—reducing overall risk while enhancing income potential.

If you're looking to double up, consider dollar-cost averaging into these stocks amid current market dips. Always align with your risk tolerance and consult a financial advisor, but based on fundamentals, these are primed for the long game. In a world where passive income is king, loading up on Realty Income and AbbVie could be your ticket to financial freedom.

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