Dividends can be a crucial component for any long-term wealth-building strategy. How so? Well, investors who reinvest dividend distributions over time can supercharge the power of compound interest. It's measured by a metric called total return, which simply takes stock price performance and adds dividend payments to the gain or loss.
Take Microsoft, for example. The stock has gained 419% in the last decade, but when dividend payments are added in, shares have posted a total return of 565%. That's an extra return of 146% just from owning the stock.
While well-known businesses such as Microsoft often grace the list of top dividend stocks to own for the long haul, sometimes the best income stocks are the ones nearly everyone is overlooking. Here's why three contributors at The Motley Fool chose WestRock (NYSE: WRK), Store Capital (NYSE: STOR), and Brookfield Renewable Partners (NYSE: BEP) as their best unknown dividend stocks.
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A cash cow that's down on its luck
Maxx Chatsko (WestRock): Most investors have probably never heard of WestRock, but it's a leading manufacturer of paper products such as cardboard. While that market might be about as boring as a doorknob, it's consistently given rise to sustainable cash cows. That's evidenced by the company's current 4.1% dividend yield, as well as the fact that dividend payments have increased from $101 million in fiscal 2014 to a record $441 million in the just-finished fiscal 2018.
In addition to a strong legacy, the cardboard segment of the paper industry is also thriving right now thanks to a combination of rising online shopping, a growing global middle class, and China's increasing imports of finished paper products. That hasn't stopped Wall Street from sending shares of WestRock 35% lower in the last year over misplaced concerns about the trade war between the United States and China. But investors who take a closer look will see a lot to like about the business.
The trade war had no discernible impact on the business in fiscal 2018 (the company's fiscal years end Sept. 30). WestRock delivered year-over-year increases of 9% in revenue, 53% in operating income, and 27% in operating cash flow.
More important, the business just closed the $4.9 billion acquisition of KapStone. If the $200 million in annual cost savings are realized in the next few years, then the purchase price will work out to just seven times enterprise value to EBITDA. The acquisition will also allow WestRock to increase the volume of paper and cardboard products in its product mix going forward -- the most valuable products in the industry.
Therefore, although the stock has lost quite a bit of value in the last year, Wall Street might have a difficult time defending its sentiment. WestRock delivered a strong performance in fiscal 2018 and is about to get another shot in the arm from the KapStone acquisition.
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This unfamiliar REIT is an income lover's dream
Todd Campbell (Store Capital): Most investors have never heard of Store Capital, but there's a good chance they're familiar with the companies leasing its real estate.
Unlike traditional mall operators, which are suffering from rising vacancy rates because of e-commerce, Store Capital leases about 2,100 freestanding buildings it's acquired at below-market rates to businesses less likely to see sales decline because of the internet. Its tenants include movie theaters, automotive repair, day care centers, gyms, restaurants, and other service-oriented retailers that are embedded in their local communities. Overall, it works with 400 customers, including Cabela's and Applebee's, across 500 retail concepts.
Of course, there's always a chance a tenant will falter, but Store Capital does a good job at avoiding this risk by evaluating tenant financials at an individual store level to avoid surprises and limiting its exposure to any one tenant. Its occupancy rate is about 99%, and no customer accounts for more than 3% of its annualized rental income.
Business has been so good for the real estate investment trust (REIT) that its annual dividend has increased an average 6.6% per year since its IPO in 2014. Currently, it yields 4.3%, and since revenue and funds from operations (FFO) are growing, those dividends could continue climbing for a while.
Last quarter, revenue rose 24% year over year to $137 million and FFO increased 26% to $97.4 million, or $0.47 per share. Since the REIT's only paying out 70% of its net income in dividends, it has plenty of financial flexibility.
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The hydro-powered dividend
Travis Hoium (Brookfield Renewable Partners): Dividend stocks are no better than the underlying cash flows of the business that's paying them, which can often be overlooked when investors are searching for high yield. One company with stability of both cash flows and yield is Brookfield Renewable Partners, which owns and operates hydro-, wind-, and solar-power plants around the world, selling electricity into local markets and often with the backing of long-term contracts. The result is a stable stream of cash flows that's used to pay the 7.2% yield shares we have today.
Long term, the company aims to increase its dividend 5% to 9% organically by using excess cash flow to fund growth acquisitions. The company is paying out 100% of its funds from operations as a dividend today, but it aims to lower that to 90% by 2022 without having to make a significant outside investment and while increasing the dividend 5% per year.
What makes Brookfield Renewable Energy unique from other yieldcos is its base of hydroelectric power plants. Hydro plants make up about 80% of the company's cash flows, and unlike wind and solar farms, they're built to last 100 years or more. That provides certainty the company will be generating cash for many, many decades to come.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Maxx Chatsko has no position in any of the stocks mentioned. Todd Campbell owns shares of Microsoft. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of Microsoft. The Motley Fool has a disclosure policy.