Dividend stocks come in all shapes and sizes, but income investors are often drawn to those with the highest return. Unfortunately, companies that pay huge dividends often have diminished prospects for growth, which can lead to poor performance or even a net loss for shareholders.
With this in mind, income investors should avoid chasing high returns and instead focus on buying dividend stocks backed by booming companies. Stocks like this have a good chance of beating the market. for example, apple (AAPL -1.06%) And the Walker and Dunlop (WD -1.99%) Paying quarterly consideration to shareholders, both stocks have significantly outperformed Standard & Poor’s 500 over the past five years.
Here’s what you should know.
Apple pays a meager $0.23 per share — the dividend yield is just 0.56% — but the company has been increasing its quarterly payouts by an average of 9% annually over the past decade. Even better, Apple has new augmented and virtual reality (AR/VR) hardware in the works, and the high-margin services business is gaining momentum, which will drive profitability in the coming years.
Apple taps into the power of the big brand. Earlier this year, Brand Finance and Kantar recognized Apple as the world’s most valuable brand, citing an astonishing level of consumer loyalty and its reputation for quality and innovation. On that note, Apple saw its installed hardware base hit a new level across all product categories in the third quarter, which is particularly impressive considering consumers battle high inflation.
The company, driven by strong demand, has delivered a solid financial performance over the past year. Revenue increased 12% to $387.5 billion, but earnings jumped 19% to $6.06 per diluted share. Investors can attribute this rapid earnings growth to momentum in the services sector — think the App Store, Apple Pay, and subscription products like Apple TV+. Gross margin on Apple services is usually above 70%, while gross margin on products is usually in the middle of the 30% range.
Moving into the future, Apple is set to become increasingly profitable as its services business grows, but investors have another reason to be excited. The company showed off its AR/VR glasses to board members in May, according to BloombergAnd analyst Ming-Chi Kuo believes Apple may launch the device in January 2023, with a pair of augmented reality glasses to follow in 2024 or 2025.
Apple caught lightning in a bottle with the iPhone, and an AR/VR headset could be just as successful this time around. This is why this stock is so suitable for passive income investors.
2. Walker and Dunlop
Walker & Dunlop specializes in commercial real estate and financing services. The company creates loans, brokers the sale of debt to institutional investors, and brokers the sale of real estate. Notably, most of its funding comes from loans created and sold through government-sponsored institutions such as Fannie Mae And the Freddy Mac. This means that Walker & Dunlop bears little risk of loss, because it does not hold loans on its balance sheet.
In addition, the company offers most of the loans you get. It also provides asset management services focused on affordable housing, which is especially important given the surge in home prices over the past few years.
Today, Walker & Dunlop is the fourth largest commercial real estate lender in the United States, and the largest provider of capital to the multifamily industry. Despite higher interest rates, the company has had a relatively strong financial performance over the past year. Revenue increased 18% to $1.4 billion and earnings settled at $8.36 per diluted share.
The lack of earnings growth is due in large part to the expenses associated with the acquisition of Alliant Capital and GeoPhy, both of which should contribute significantly to growth in the coming years. Specifically, Alliant is working to advance Walker & Dunlop’s position in asset management and low-income housing markets, and GeoPhy will accelerate emerging lines of business such as real estate valuation and microlending.
Looking to the future, Walker & Dunlop is well positioned for future growth. Commercial loan creation will reach $895 billion this year, and $418 billion of that total will go to the multi-family market. In addition, more than $400 billion of multifamily loans are expected to mature between 2022 and 2026, creating a significant opportunity to refinance existing loans. As the largest provider of capital to the multi-family industry in the United States, Walker & Dunlop should take advantage of these trends.
Finally, the company pays a quarterly dividend of $0.60 per share, which equates to a modest dividend yield of 2.19%. So investors get the best of both worlds: a stock with market-beating potential that also generates passive income. This is why a dividend stock is worth buying.
Trevor Jennewine has no position in any of the stocks mentioned. Motley Fool has and recommends positions at Apple and Walker & Dunlop. The Motley Fool recommends Walker & Dunlop, Inc. It recommends the following options: long calls in March 2023 worth $120 on Apple and short calls in March 2023 worth $130 on Apple. Motley Fool has a disclosure policy.