Dividend-paying stocks can pack a mighty punch. They generate passive income and can generate stock price appreciation. Historically, dividend payers have produced an annual average of 9.6% full return, according to data from Hartford Funds and Ned Davis Research. This exceeded the total yield of the S&P500 equally weighted index (average annual total return of 8.2%).
Companies that steadily increase their dividend payouts have produced even stronger total returns. They averaged 10.7%, compared to an average annual total return of 7.1% for companies that did not change their dividend policy.
Two companies with excellent track records of producing growing dividend income and achieving high total returns are black stone (Bx 3.27%) And Brookfield Power (BEPC 4.63%) (BEP 2.93%). With more growth to come, they stand out as the best stocks to buy for those looking for income and upside potential.
The leader should only grow
Blackstone has a unique dividend policy. The leading alternative asset manager returns nearly all of its distributable earnings to investors each year through dividends (the primary yield method) and share buybacks. Although this framework leads the company dividend payments ebbs and flows with its earnings, the payout has risen sharply over the years, driven by earnings growth:
Data source: Blackstone. Table by author.
Over the past decade, Blackstone has grown its distributable earnings at an annual rate of more than 20%. This has contributed to an almost 700% increase in the company’s annual dividend spend over the past 10 years.
This combination of earnings and dividend growth has helped Blackstone achieve an average annual total return of 21.8% over the past decade. This far exceeded the S&P 500’s average annual total return of 11.8%.
Blackstone should be able to continue to grow earnings and dividends at above average rates. While the company is already the largest manager of alternative assets, with over $975 billion in assets under management (AUM), the sector is growing rapidly. Preqin, a leading provider of data and insights for the alternative investment industry, forecasts global alternative assets under management to exceed $18 trillion by 2027, nearly doubling its total of $9.3 trillion. dollars in 2021.
Given Blackstone Brand reputation, it is expected to capture an inordinate share of the industry’s growth. This allows the company to grow its earnings and dividend (which yields more than 5%, based on its dividend payout over the past 12 months) at an above-average rate.
Connected to a powerful engine of growth
Brookfield Renewable has a much more stable history of dividend growth. The world’s largest producer of renewable energy has increased its payout by at least 5% per year since 2011. That growing payout has helped fuel Brookfield’s average annualized total return of 16% since inception. This rate significantly exceeded the average annual total return of 7% of the S&P 500 during this period.
The company should have enough power to keep increasing its dividend, which yields a nice 4.4%. Brookfield has several catalysts to drive earnings growth over the next several years, including:
- Inflation: Brookfield sells its power under long-term, fixed rate power purchase agreements. Most contracts include annual rate indexation clauses linked to inflation. This pilot should add 2% to 3% of its operating funds (FFO) per share each year.
- Margin improvement: Higher electricity prices should allow the company to secure better rates when existing PPAs expire. Brookfield is seeing its margins improve, growing its FFO per share an additional 2-4% per year.
- Development pipeline: Brookfield has more than 110 gigawatts of renewable energy projects under development (enough to power every home in Canada for a year). These projects should add 3% to 5% annually to the FFO per share.
- Acquisitions: Brookfield has a long history of closing value-added deals. He sees an annual increase of up to 9% in acquisitions.
These catalysts are expected to drive annual FFO growth of 7% to over 20% over the next few years. This easily supports Brookfield’s plan to increase the dividend at an annual rate of 5% to 9%.
Positioned to potentially produce stupendous total returns
Blackstone and Brookfield Renewable pay dividends that yield more than double that of the S&P 500 (1.7%). This offers investors a nice source of income. In addition, they have significant growth potential. This should allow them to continue to increase their dividends while providing attractive share price appreciation.
All of this means they could produce sizable total returns over the next few years, making them the best stocks to buy for income and upside potential.
Matthew DiLallo has positions in Blackstone, Brookfield Renewable and Brookfield Renewable Partners and has the following options: $60 short-term put options on Blackstone in June 2023. The Motley Fool holds positions and recommends Blackstone and Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.