The S&P 500 has gone on a strong run over the past 1 1/2 years, powered by low interest rates and government stimulus to jump-start a pandemic-stricken economy. Overall, the index has rallied nearly 30% since the start of 2020, including almost 12% so far in 2021.
However, one of the downsides of this rally in the stock market is its inverse effect on dividend yields. Overall, they’ve fallen to a rather lackluster 1.4% average for stocks in the S&P 500.
On a more positive note, there are still some attractive dividend stocks out there. Three top ones with yields more than double the S&P 500’s average are AvalonBay Communities (NYSE:AVB), Boston Properties (NYSE:BXP), and Duke Energy (NYSE:DUK).
Solid performance despite the storm
AvalonBay Communities’ dividend currently clocks in at 3.1%. The real estate investment trust (REIT) focuses on owning apartment buildings in many of America’s biggest cities.
While the pandemic impacted occupancy and rental rates in many urban areas where AvalonBay owns apartments, demand has started improving this year. As a result, occupancy was approaching 96% at the end of the first quarter, helping drive rental rates on new leases up about 5% from January through April.
While the past year had its operational challenges, that didn’t stress the company’s financial profile because it possesses a top-notch credit rating that it complements with a conservative dividend payout ratio. That enabled AvalonBay to maintain its dividend while investing in new development projects and acquisitions.
It recently completed three developments, adding 1,371 apartment homes and 19,000 square feet of commercial space to its portfolio. Meanwhile, it has 13 more communities under construction that will add another 3,757 homes and 43,000 square feet of commercial space upon completion. Those future additions should help grow the company’s cash flow, supporting its ability to increase its dividend in the future as it’s done on a relatively consistent basis over the years.
Ready for the return
Boston Properties currently pays a 3.4%-yielding dividend. The company supports that payout with one of the largest portfolios of office properties in the country.
While the office market also faced some headwinds from the pandemic, occupancy levels and rental rates held up reasonably well because most companies expect to return to their offices in a post-pandemic world. While there will likely be more remote work in the future, companies have realized that offices are vital for creating culture, training, innovation, and competing for clients. Because of that, most companies continued to pay their office leases even though they didn’t physically occupy the space. That enabled Boston Properties to generate relatively steady cash flow to support its dividend.
Meanwhile, the company also continued to make progress on its development projects. It has $2 billion of office developments underway and has already pre-leased 86% of the available space. On top of that, it’s investing another $558 million into life science redevelopment and development projects, as that industry expands as a result of the pandemic.
Those investments will generate more than $200 million of incremental income for the REIT, once complete. Add that to its top-notch balance sheet, and the REIT should be able to grow its already compelling dividend in the future, as it has routinely done over the years.
Investing for the future
Duke Energy’s dividend currently yields 3.8%. The utility backs that payout with stable cash flow generated by distributing electricity and natural gas to customers.
The company currently expects to grow its earnings per share at a 5% to 7% annual rate through 2025 as it invests in cleaning up its carbon-emissions profile. Overall, Duke expects to spend $59 billion through 2025 to replace its coal portfolio with renewable energy generating facilities.
While that’s a lot of money, the company has a strong balance sheet, relatively conservative dividend payout ratio, and other financing sources such as asset sales to execute that plan. As those investments increase the company’s earnings, that should give it the power to steadily grow its already attractive dividend as it has in each of the last 14 years.
Solid options for income investors
While rising stock prices have pushed down most dividend yields, there are still some attractive options out there for investors seeking more dividend income. However, what makes AvalonBay Communities, Boston Properties, and Duke Energy stand out, in particular, is that they offer high yields with upside potential since all three should be able to increase their payouts in the future. That makes them intriguing options for yield-seeking investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.