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As we approach the final stretch of the year, with interest rates likely to dip on traditional fixed-income investments, the investors might be looking for dividend-paying stocks as it offers the potential for both income and capital appreciation. Realty Income (NYSE:O) and Costco Wholesale (NASDAQ:COST) are two dividend paying stocks that can be assessed or kept in watchlist.
Realty Income: The Monthly Dividend Powerhouse
Realty Income is a name synonymous with stability in the real estate investment trust (REIT) sector. With a portfolio encompassing over 15,000 commercial properties, Realty Income’s strategy is centered around leasing to businesses that are either recession-resistant or largely unaffected by the rise of e-commerce. This focus on high-quality tenants provides a reliable stream of rental income, with an estimated 90% of its collected rent coming from such resilient industries.
A key feature of Realty Income’s approach is the use of triple-net leases. These leases require tenants to cover variable costs like property taxes, insurance, and maintenance, thus reducing financial burdens on Realty Income and increasing the predictability of its cash flows.
The REIT pays dividends on a monthly basis, offering a steady stream of income. Impressively, Realty Income has raised its dividend for 107 consecutive quarters, highlighting its commitment to returning value to shareholders. In the most recent quarter, the REIT reported a 6% increase in adjusted funds from operations (AFFO), underscoring its ability to generate steady, if unspectacular, growth.
While Realty Income’s slow growth may seem less exciting, it offers a level of predictability that’s rare in today’s volatile market. The company has grown its bottom line in 27 of the past 28 years, proving its resilience even in high-interest-rate environments. As interest rates start to decline, Realty Income’s stock could benefit, further enhancing its appeal to income-focused investors. Currently, the stock yields 5.1%, which is competitive with the returns offered by top-paying money market funds, making it an attractive option for those seeking a blend of income and stability.
Costco Wholesale: A Defensive Play with Growth Potential
Costco Wholesale may not be the first name that comes to mind for income investors, given its modest dividend yield of 0.5%. However, what it lacks in yield, it more than makes up for in reliability and potential for capital appreciation. Costco has also occasionally issued large one-off special dividends, rewarding long-term shareholders.
Costco’s business model is designed to thrive in both good times and bad. In prosperous times, consumers flock to Costco for bulk purchases and premium goods. In tougher economic conditions, the company’s low-margin, value-driven approach attracts budget-conscious shoppers. During the Great Recession in 2009, Costco’s revenue dipped a mere 1.5%, and outside of that small decline, it has posted positive revenue growth for over 30 years.
One of the most intriguing aspects of Costco’s business is its membership model. In July, the company increased its annual membership fee by 8%—its first hike in seven years. While the market was initially disappointed by the conservative increase, it reflects Costco’s prudent approach to maintaining its customer base, which is essential during economic uncertainty. Interestingly, Costco generates more operating profit from these membership fees, which constitute just 2% of its revenue, than from the entirety of its retail operations.
