In these times of uncertainty regarding interest rates and escalating trade tensions, it can be enticing to own shares of a dividend stock. Not only are they typically less risky and more stable businesses, but they offer investors consistent income for owning shares. However, because dividend stocks are often not the most exciting growth stories, many remain overlooked.
So, we asked three Motley Fool contributors to highlight some unknown but amazing dividend stocks for you to check out: Fastenal (FAST -0.01%), Simon Property Group (SPG 0.78%), and Broadridge Financial Solutions (BR 0.26%).
Boring but brilliant
Daniel Miller (Fastenal): You won't find Fastenal on a watch list filled with high-flying, exciting growth stocks. In fact, the relatively unknown company that produces fasteners, tools, safety products, and even janitorial supplies, probably won't make many investors' watch lists at all – but that's a mistake. While some investors might find its business boring, its dividend and financial results have been anything but!
Image source: Getty Images.
Fastenal started dishing out annual dividend payments to investors in 1991, and followed that with a decision to send semi-annual dividend payments in 2003 before moving to quarterly dividends in 2011. The company had a track record of increasing its dividend annually, and it's even accelerated the number of hikes by increasing the dividend twice per year in both 2018 and 2019. After recently bumping the dividend higher, Fastenal's dividend yield currently sits at roughly 2.9%.
While escalating trade tensions and a possible economic slow down could negatively impact Fastenal's business, investors should be optimistic about management's strategy to get closer to its customers. Fastenal's recent strategy has been to open on-site locations where it essentially runs its clients' parts inventory.
During the first half of 2019, the company signed 199 new on-site locations, bumping its total count to 1,026, and management hopes to repeat that number of signings during the second half of 2019.
Fastenal's business isn't going to produce exciting stories shared between co-workers during a coffee break, but the company manufactures products that are vital to its customers, and as it develops more on-site locations -- which builds its stickiness, effectiveness, and overall relationships with consumers -- it should continue to thrive and dish out healthy dividend yields to investors.
A bet on luxury
Jeremy Bowman (Simon Property Group): A bet on retail real estate may seem like an odd choice these days as the rapid growth of online shopping has stoked fears of a "retail apocalypse" among investors. However, rumors of the industry's demise have been greatly exaggerated. While struggling mall chains like Payless and Sears have gone bankrupt, plenty of high-end stores are thriving. Apple stores continue to be mobbed, and lululemon athletica has made a mint in high-end athletic apparel.
One company at the center of America's thriving high-end malls is Simon Property Group, a retail real estate investment trust that offers a cool 5.4% dividend yield. As a REIT, Simon must pay at least 90% of its earnings back to investors as dividends so investors are pretty much guaranteed to get a substantial income stream from the stock.
Simon's key metrics are solid. Its occupancy rate in the second quarter (its most recent) was 94.4%, and its tenants reported a 3.5% increase in retail sales per square foot to $669, about the twice the industry average at $325, a sign that retail partners are finding success in today's environment.
Simon is also teaming up with several of its retail tenants to launch an e-commerce marketplace that's expected to debut soon called Shop Premium Outlets. The site is designed in part to help drive traffic to its outlet malls, and the move will give the company a stake in the high-growth e-commerce segment.
Simon just raised its dividend by 5% and the payout is well funded with a payout ratio of 68% based on this year's expected funds from operations, which is the REIT equivalent of free cash flow.
For a steady dividend payer that should continue to benefit from the bifurcation in retail and growth among high-end brands, Simon looks like a smart choice for income-seeking investors.
A hidden monopoly
Brian Feroldi (Broadridge Financial Solutions ): When a business hits the public markets, it is required by law to provide its investors with regular updates. This includes documents like proxy statements, prospectuses, annual reports, and more. How do public companies ensure that they always remain compliant with the law? The usual answer is to hire Broadridge Financial Solutions.
Broadridge holds a monopoly-like position in the boring but necessary field of investor governance and communication. Broadridge provides proxy services for about 80% of outstanding shares in the U.S. It also supplies mission-critical securities processing solutions for capital markets, wealth management, and asset management firms. On a typical day, it processes over $5 trillion in equity and fixed income trades.
While neither of these business units is growing very fast, they do provide the company with multiple sources of recession-resistant recurring revenue. That gives Broadridge's management team a lot of flexibility when it comes to capital allocation. The company has a long history of using its excess capital to make tuck-in acquisition, buy back stock, and boost its dividend payment.
BR average diluted shares outstanding (quarterly). Data by YCharts.
Broadridge isn't a high-growth business -- market watchers expect earnings to grow about 10% annually over the next half-decade -- but it is a rock-solid business with a history of outperformance and it currently offers up a dividend yield of 1.7%. If you're looking for a steady income stream and dependable long-term returns, then Broadridge could be right up your alley.
