Key Points
Income investors should focus on companies with strong dividend histories and sound businesses.
Diversification is important for investors, whether you have $5k or vastly more, and you can achieve it in more than one way.
Three high-yield dividend stocks new investors should consider are Realty Income, PepsiCo, and Enbridge.
If you are just starting out as an investor and looking to generate a reliable income stream, you should begin your search with companies such as Realty Income (NYSE: O), PepsiCo (NASDAQ: PEP), and Enbridge (NYSE: ENB). In fact, these three stocks could offer new investors a highly diverse portfolio with a relatively small investment of even $5,000. Here's a look at each of these high-yield dividend stocks and why they work so well together.
Realty Income: The Monthly Dividend Company
Realty Income is the largest net-lease real estate investment trust (REIT). That means that it owns properties and leases them to tenants, but the tenants agree to pay most property-level operating expenses. This reduces Realty Income's costs and risk because it doesn't have to handle day-to-day operations at its properties. The company owns over 15,500 properties across the retail and industrial sectors, including unique property types such as casinos and data centers. And its portfolio spans both North America and Europe.
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The big story here, however, is Realty Income's commitment to the dividend, which has been increased annually for 31 years. It is paid monthly, which is why the company trademarked the nickname "The Monthly Dividend Company." The REIT is built from the ground up to be a reliable dividend payer, with a diversified foundation that it has gradually expanded over time, building on the company's strengths to enter new markets and property niches. For example, it recently started offering institutional asset management services, generating a new fee-based income stream for shareholders. The key is that the services it provides are essentially built on what it is already doing. More revenue, little extra work.
With a well-above-market 5.1% dividend yield, Realty Income is a solid foundation for a diversified dividend portfolio.
PepsiCo: Three businesses in one
PepsiCo is one of the world's largest consumer staples companies and a name you probably know well from the grocery store. What you might not know is that it has increased its dividend annually for over 50 years, which makes it a Dividend King. You don't build a dividend streak like that by accident; it requires a strong business plan that gets executed well in both good times and bad. Unfortunately, right now isn't the best of times for PepsiCo, and the stock is trading with a historically high 4.1% yield. That's an opportunity for long-term investors, whether they are new to investing or old hands.
What's most interesting is that PepsiCo is really three businesses in one. The company operates the world's largest salty snack business in Frito-Lay. It is the second most important beverage company, via its namesake Pepsi business. And its Quaker Oats operation is a large packaged food business. With a global distribution system, the company provides a huge amount of diversification in one food business. And if history is any guide, the company will eventually turn its sluggish recent performance around and start growing again. For most, the risk-versus-reward balance will be well worth the investment given the highly attractive yield on offer right now.
Enbridge: Changing with the world
Last up is North American energy giant Enbridge, which has a 5.5% yield. The energy sector is highly volatile, since oil and natural gas are commodities. However, Enbridge doesn't sell these fuels; it charges fees for helping to move them around the world. Given the importance of oil and natural gas to the global economy, demand for Enbridge's fee-generating services is always fairly strong. And those reliable cash flows back a strong and growing dividend. Notably, the dividend has been increased annually in Canadian dollars for 31 years.
However, diversification is a key theme. While energy infrastructure is the focus, Enbridge doesn't only own oil and gas pipelines. It also operates regulated natural gas utilities and a handful of clean energy assets. These businesses generate reliable income streams just like the pipeline business. But they highlight that Enbridge is living up to one of its key goals, providing the world with the energy it needs, whatever that may be. History shows that Enbridge provides investors a way to gain broad energy exposure that adjusts to the world around it, meaning you can buy and hold without worrying too much about changing energy trends.
$5,000 to start and a growing income stream
How you break up a $5k investment is up to you. But an equal amount in Realty Income, PepsiCo, and Enbridge is probably a good starting point, given there's little overlap between the businesses. That would equate to around 26 shares of Realty Income, 11 shares of PepsiCo, and 32 shares of Enbridge. A solid start for a bright dividend future, particularly if you can reinvest your dividends, allowing them to compound over time.
Reuben Gregg Brewer has positions in Enbridge, PepsiCo, and Realty Income. The Motley Fool has positions in and recommends Enbridge and Realty Income. The Motley Fool has a disclosure policy.