Investing in great dividend stocks has been a great way to build wealth over the very long term in the stock market. The companies that have made this kind of investing lucrative are ones just like PepsiCo, those with long track records of increasing dividends with attractive yields.
While Pepsi's current dividend yield of 3% and a business plan to improve its existing assets and provide steady returns sound compelling, we asked three of our Motley Fool contributors to each highlight a stock they like with a higher dividend yield and perhaps a more impressive growth plan. Here's why they picked Cardinal Health (NYSE: CAH), HCP (NYSE: HCP), and Enviva Partners (NYSE: EVA).
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Sip on this high-yield healthcare middleman
Sean Williams (Cardinal Health): While it would be tough for any investor to surpass the safety of PepsiCo's 3% dividend, one intriguing high-yield stock with an even better dividend is pharmacy benefit management (PBM) and medical device company Cardinal Health.
As a PBM, Cardinal Health has taken it on the chin in recent years, with calls for prescription-drug reform picking up on Capitol Hill. PBMs act as middlemen between insurers and consumers, negotiating the best deals for insurers on prescription drug prices, while only sometimes passing along cost savings to the consumer. This might sound like a business model poised for disruption, but it isn't. A highly partisan Congress has virtually ensured that prescription-drug reform has no chance of passing both houses of Congress and being signed by President Trump.
This is also a company that should begin to see improvement with its medical device segment, which accounted for about 11% of its sales in 2018. Supply chain issues have plagued cardiovascular device maker Cordis, which was acquired in 2015. Cardinal Health has been steadfast in its efforts to resolve these inventory issues, with bottom-line improvements expected to match top-line growth by later this year.
Speaking of efficiencies, Cardinal Health has also been successful in driving down its distribution, selling, general, and administrative expenses. The fiscal second quarter featured a $67 million decline in its largest recurring expense to $1.06 billion.
Finally, generic-drug pricing weakness appears to be nearing an end. Though weaker pricing power for generics has weighed down both generic-drug manufacturers and PBMs, this is unlikely to remain the case over the long run as an aging population and soaring branded-drug pricing create the perfect recipe for higher generic-drug usage and pricing power.
At less than 10 times 2019's projected EPS and with a 4% yield, Cardinal Health is the drink you should be taking.
The real estate investment playing on this massive demographic trend
Tyler Crowe (HCP): Real estate investment trusts, or REITs, were pretty much built to deliver great dividend payouts to investors. As pass-through entities, they are legally obligated to pass on a vast majority of their net income to investors through dividends. That's why so many stocks in this particular industry have yields well above the broader market and Pepsi in particular.
HCP stands out among the many REITs out there because it is a healthcare REIT that invests specifically in healthcare-related properties such as senior living communities, medical offices, and life sciences buildings. These types of properties are very attractive investments because it is an incredibly stable portion of the real estate market. Unlike industrial or retail properties, which tend to follow the health of the overall economy, healthcare spending tends to remain steady no matter the economic environment.
What's more, there is an immense opportunity in healthcare-related properties because of America's aging baby boomer population. Annual per capita healthcare spending of the 65-84 age cohort ($15,900) nearly doubles that of the 45-64 group ($8,400). With Americans living longer, healthcare demand is expected to rise dramatically over the next several years and will require massive investment in healthcare properties.
The company has going for it a portfolio of over 700 healthcare facilities, a nearly complete multiyear effort to diversify its client base, and a $1.2 billion development pipeline. There is also plenty of room for HCP to grow its dividend, which already pays a lucrative 4.7% yield.
Wood pellets are better for your portfolio
Brian Stoffel (Enviva Partners): Enviva Partners has a value proposition you don't often find in today's market: It can manufacture and transport wood pellets en masse for international power companies. These companies, eager for cleaner inputs to reduce emissions, sign long-term contracts with Enviva that lock them in for around a decade.
Enviva ran into trouble last year when a fire occurred at one of its deepwater ports. As a result, its coverage ratio -- the amount of cash it has relative to how much it needs to pay its dividend -- dipped below 1.0. That's a dangerous sign because it means it's paying out more than it has in distributable cash flow.
Since then, however, management has largely righted the ship. The company now expects to distribute $2.65 per share -- which is good enough for an 8.3% yield -- in 2019. Additionally, its coverage ratio will be 1.2 -- another way of saying the dividend will eat up 83% of distributable cash flow. That's a healthy target. And the company sees robust growth in future years, too. CEO John Keppler recently said, "we expect to be able to deliver double-digit annual distribution growth, along with higher coverage levels, for the foreseeable future." That means at least 10% growth in the payout, which should be music to investors' ears.
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Brian Stoffel owns shares of Enviva Partners. Sean Williams has no position in any of the stocks mentioned. Tyler Crowe owns shares of HCP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.