Though Pepsi's (NASDAQ: PEP) 3.9% dividend yield isn't the highest on the market, it's also a sizable payout given the company's history and stability. Investors looking for more yield, however, do have other options.
Three of our Motley Fool contributors rounded up their favorite high-yield stock and Store Capital (NYSE: STOR), Kinder Morgan (NYSE: KMI), and TerraForm Power (NASDAQ: TERP) made the list. Here's why they like them so much.
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A great way to invest in real estate
Todd Campbell (Store Capital): Investing in retail real estate has gotten trickier because e-commerce has caused tenant bankruptcies or store closures. However, e-commerce doesn't pose nearly as big of a risk to Store Capital, a real estate investment trust that specializes in freestanding real estate for service-oriented businesses.
Store Capital leases about 2,100 buildings to internet-resistant retailers including movie theaters, automotive repair, day care centers, gyms, and restaurants. It vets tenants on unit-level performance, further improving the odds against store closures, and no single company accounts for over 3% of its annual rental income.
The model is a winner. Its occupancy rate is about 99% and built-in rent increases and new properties are fueling funds from operations growth, supporting dividend increases. Currently, Store Capital's dividend yield is a healthy 4.1%.
I'm not the only one who thinks Store Capital's a good dividend stock, either. Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), the company controlled by legendary investor Warren Buffett, is Store Capital's second-largest institutional shareholder. Buffett's penchant for picking winners suggests this REIT's worth owning.
A bigger payday now with even bigger ones later
Matt DiLallo (Kinder Morgan): With a 4.1% dividend yield, natural gas pipeline giant Kinder Morgan currently offers a more attractive payout than Pepsi's 3.2%-yielding dividend. That bigger payday is as sustainable as they come. For starters, Kinder Morgan only pays out about 38% of its very stable cash flow to support its high-yield dividend. That leaves it with plenty of excess cash to invest in growth-focused initiatives. On top of that, Kinder Morgan has a strong investment-grade balance sheet, which provides further support for its operations.
However, Kinder Morgan's dividend is made even more appealing by its growth prospects. That's because the company currently expects to increase its dividend by 25% this year. Supporting the natural gas pipeline giant's big boost is its growing cash flow from expansion projects, which will enter service this year and a slight bump in its payout ratio to 46%, which is still very conservative for a pipeline company. Meanwhile, Kinder Morgan expects to increase its dividend another 25% next year, fueled by those same two factors.
This growth forecast suggests that investors who buy today could lock in a 6.4% yield for 2020, or double what Pepsi currently pays. While the latter has been growing its dividend at a healthy rate over the last few years, the company is unlikely to increase it as fast as Kinder Morgan in the future. That combination of a higher payday today and an even bigger one in the future is why income-seeking investors should seriously consider Kinder Morgan.
A rock-solid energy dividend
Travis Hoium (TerraForm Power): Renewable energy yieldcos were once one of the hottest investing areas on the market, offering high dividend yields and strong growth. TerraForm Power was one of the industry's power children until its sponsor, SunEdison, went bankrupt. That threw the company into chaos and killed the stock price until Brookfield Asset Management (NYSE: BAM) stepped in to take control in 2017.
Since then, TerraForm Power has stabilized operations of its 3,600 megawatts (MW) of assets and resumed paying a dividend, which now yields 6.4%. Funding that dividend are long-term contracts with utilities, which buy the energy produced by TerraForm Power's wind and solar assets. The average contract currently stands at 14 years, ensuring many years of cash flow.
Of the cash that's generated and available for distribution, the company expects to pay out 80%-85%, keeping the remaining to fund growth acquisitions.
Not only does TerraForm Power pay more than Pepsi from a yield standpoint, but it also has very stable operations and cash flows. That's reassuring if you're looking for a rock-solid dividend stock today.
Finding great payouts
Dividends come in all shapes and sizes, and strong yields like those offered by Store Capital, Kinder Morgan, and TerraForm Power can be a great way to grow wealth over the long term.
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Matthew DiLallo owns shares of Berkshire Hathaway (B shares), Brookfield Asset Management, Kinder Morgan, and TerraForm Power. Todd Campbell has no position in any of the stocks mentioned. Travis Hoium owns shares of Berkshire Hathaway (B shares) and Kinder Morgan. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Kinder Morgan. The Motley Fool owns shares of Brookfield Asset Management. The Motley Fool has a disclosure policy.