Investors can get income and growth with these smaller companies.
There’s no shortage of great things to say about dividends. They provide regular cash payments. Once paid, they’re yours to do with as you please. And over time, a great company will grow them, creating better cash flows than the stable ones offered by bonds.
Typically, dividends are seen as coming from mature companies with little growth prospects.
That’s not always the case, however. We’ve found two companies that can grow their business while also providing generous payouts.
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With all eyes in the market focused on growth—or at least the overall markets making new all-time highs—a focus on smaller companies with more growth ahead, as well as a generous dividend now, looks like a great way to stay invested without giving in completely to the hype.
High Dividend Growth Play #1: Apple Hospitality REIT (APLE)
A name that’s shown up on our radar a few times thanks to purchases by insiders, is the high-yielding Apple Hospitality REIT (APLE). While most names in the space pay in the mid-single digit range, this high-end hotel chain is showing investors a yield closer to 7.5 percent right now.
That’s the kind of return on par with the stock market’s average annual return… just from the dividend. With cash returns like that, capital gains are just extra gravy that can provide investors some upside as well.
While revenue has been flat over the past year, the REIT also shines as being lightly leveraged for the real estate space, with a debt level less than half the company’s market cap.
With some REITS leveraged 2-3 times their equity, that’s a safe level and one that provides investors more upside potential and higher yields than better-known names in the REIT space.
And the company’s focus on high-end hotel experience, it’s not losing customers as rapidly to low-priced alternative rentals from Airbnb. Higher-end hotel properties tend to hold up better than the overall hotel space during a recession, when lower-end hotels suffer disproportionately as the middle and lower classes tend to skip vacations.
That makes it a great, high-yielding play for the long-term to bet on continued economic expansion that insiders love as well.
Shares of Apple can be bought under $17 right now, and investors can probably buy more under $15 on the next market pullback.
Given the high yield of the REIT space, this isn’t the best name for speculators, the April 2020 $17.50 call options trade for less than $0.20, or $20 per contract, and could have a big percentage move if shares push higher.
High Dividend Growth Play #2: Tapestry (TPR)
The owner of brands such as Coach and Kate Spade, Tapestry (TPR) has often seen its shares go in and out of fashion.
Right now, it’s out of favor. Over the summer, the company missed sales estimates and lowered guidance—the kind of move good to send shares down to a decade low.
But even with that weakness, including a planned slowdown in new store openings, the company produces massive cash flow—which may explain why shares are back on the rise… although they’re still more than 30 percent below their 52-week highs. Shares got knocked down to under 10 times earnings, and trade just above them today.
While consumer tastes shift more rapidly today, brands like Coach and Kate Spade should still be able to command a premium to most stocks, not a discount. 10 times earnings is more appropriate to a commodity company, and it’s a valuation that won’t last for long.
The company is continuing with a $1 billion announced share buyback, and at current prices shares yield just over 5 percent.
This gives investors a solid return with more upside potential. If shares return to their old 52-week high of $41, investors could get paid 5 percent to wait for that 51 percent capital gain. And as long as shares remain depressed, the company can buy back more with its $1 billion bankroll.
Shares of the company are a buy up to $27.50, with an eye towards taking profits on any move into the $40 range if there’s a quick spike in the markets.
Speculators may want to look at the May 2020 $25 calls. While a bit pricey around $3.70 right now, a move in shares to $35 would nearly triple the value of the option to $10.