If I Could Only Buy 2 High Dividend Yield Companies In October 2023

Investment Thesis

When it comes to a broadly diversified investment portfolio with a reduced risk level applicable for any market scenario (bullish or bearish), I generally suggest combining both high dividend yield companies and dividend growth companies.

Combined, they can help you generate extra income and increase this amount annually, helping you become more independent from the stock market’s price fluctuations. I implement this approach with the construction of The Dividend Income Accelerator Portfolio.

Today’s article focuses on high dividend yield companies that I believe are currently particularly attractive. Investing in high dividend yield companies is a great way for investors to generate extra income without the necessity of selling positions of your investment portfolio. In addition to that, high dividend yield companies can help you to invest with a lower risk level (when incorporating companies with a Beta Factor below 1).

One of the most important points to consider is that the high dividend yield companies you plan to include in your investment portfolio pay a sustainable dividend. Companies with a relatively low Payout Ratio and which have intact growth perspectives, help you to decrease the probability of a dividend cut, which in turn, could have a strong negative impact on your investment portfolio’s Total Return. Focusing on companies that pay a sustainable dividend helps us to increase the probability of achieving an attractive Total Return when investing over the long-term.

In today’s article, I have selected two companies which I believe are attractive for dividend income investors, since they have an attractive Valuation, and both have significant competitive advantages, which help them to stand out against competitors and to decrease the risk level for investors. In addition to that, I believe that both companies pay a sustainable dividend.

However, I believe that one of them is superior to the other when it comes to risk and reward, which I will further explain in this article.

The companies needed to fulfil the following requirements in order to be included in a pre-selection:

• Dividend Yield [FWD] > 3%
• P/E [FWD] Ratio < 20 or P/AFFO [FWD] Ratio < 20
• EBIT Margin [TTM] > 15%

I have selected the following companies for October 2023:

Realty Income

Realty Income is a company from the Retail REITs Industry that pays a monthly dividend and is part of the S&P 500 Dividend Aristocrats index. Realty Income was founded in 1969 and currently has 393 employees.

Among Realty Income’s competitive advantages are its strong financial health (A3 credit rating from Moody’s), its extensive client and industry diversification (which help the company to mitigate concentration risks), and its economies of scale.

Realty Income’s current Valuation

Realty Income’s P/AFFO [FWD] Ratio currently stands at 12.52, lying 5.29% below the Sector Median of 13.22, indicating that Realty Income is undervalued at this moment of writing.

Another metric indicating that Realty Income is currently undervalued is its Dividend Yield [FWD] of 6.15%, which lies 16.95% above its Average from the past 5 years (5.26%). Both numbers strengthen my investment thesis that Realty Income is currently undervalued.

Realty Income’s Strength when it comes to Growth

When having a closer look at the company’s Growth Metrics, it can be highlighted that its AFFO Growth Rate [YoY] stands at 9.19%, which is 18.40% above the Sector Median of 7.76%, supporting my theory that Realty Income is an excellent pick in terms of Growth. This is further underscored by the company’s EPS Diluted Growth Rate [YoY] of 25.49%, which is also significantly above the Sector Median of 2.59%.

Realty Income has recently shown significantly higher Growth Rates than its peer group: while Realty Income has a Revenue Growth Rate [FWD] of 29.86%, Kimco Realty Corporation’s (KIM) Revenue Growth Rate [FWD] is 11.16%, Regency Centers Corporation's (REG) is 3.14%, and NNN REIT’s (NNN) is 6.30%.

The same is confirmed when having a look at Realty Income’s EPS Growth Rate Diluted [FWD] of 17.41%, which is significantly higher than the one of Kimco Realty Corporation (EPS Growth Rate Diluted [FWD] of -22.58%), Regency Centers Corporation (-0.85%), and NNN REIT (8.46%).

Realty Income’s Dividend Yield [FWD]

Realty Income’s attractive Dividend Yield [FWD] of 6.15% in combination with its 3 Year Dividend Growth Rate [CAGR] of 4.08% and its Payout Ratio of 74.12% have contributed significantly to the fact that I have added the company to The Dividend Income Accelerator Portfolio.

Realty Income’s match with The Dividend Income Accelerator Portfolio

In the article below, you can find an in-deep analysis about Realty Income and the specific reasons for which I have decided to include the company into The Dividend Income Accelerator Portfolio:

Realty Income: A Strong Alignment With The Dividend Income Accelerator Portfolio Approach

Realty Income according to the Seeking Alpha Dividend Grades

Below you can find the results of the Seeking Alpha Dividend Grades, which further underscore my opinion that Realty Income is a great choice for investors seeking dividend income and dividend growth at the same time. The company has received an A+ rating for Dividend Consistency, and a B+ rating for Dividend Growth. For Dividend Safety and Dividend Yield, the company is rated B-.

Verizon

Verizon is a company from the Communication Services Sector that was founded in 1983. The company is based in New York and operates through the following two segments:

• Verizon Consumer Group
• Verizon Business Group

Verizon’s Current Dividend Yield

Verizon currently has a Dividend Yield [FWD] of 8.21%. The company’s 5 Year Dividend Growth Rate [CAGR] stands at 2.03%, and its Payout Ratio is 53.05%. These metrics indicate that investors could benefit from the company’s steadily increasing dividend payments when having a long investment-horizon.

Below you can find additional information regarding Verizon’s Dividend, underscoring my investment thesis that Verizon is an appealing pick for dividend income investors looking for a company that pays a sustainable dividend.

Verizon’s Current Valuation

Verizon’s current P/E [FWD] Ratio is 7.13, standing 56.74% below the Sector Median, serving as a clear indicator that it is undervalued. The same is confirmed when comparing its current P/E [FWD] Ratio with its Average from the past 5 years (which is 10.85).

Verizon’s Strength when it comes to Profitability

Verizon has a Return on Equity [TTM] of 23.22%, which is significantly above the Sector Median of 4.37%. It is further worth mentioning that Verizon’s Net Income Margin [TTM] of 15.58% stands significantly above the Sector Median of 3.60%. Both metrics underline my theory that Verizon is an attractive choice in terms of Profitability when compared to its peer group.

Verizon’s Growth Perspective

Different metrics confirm my investment thesis that Verizon has relatively limited growth perspectives, strengthening my belief in underweighting the company in a long-term investment portfolio. Verizon has shown a Revenue Growth Rate [FWD] of 0.52%, and a 3 Year EBIT Growth Rate [CAGR] of -0.65%.

I see T-Mobile clearly ahead of Verizon when it comes to Growth (which is confirmed by T-Mobile’s 3 Year EBIT Growth Rate [CAGR] of 27.87%), reinforcing my belief to underweight Verizon in an investment portfolio.

Why I incorporated AT&T instead of Verizon into The Dividend Income Accelerator Portfolio

Even though I consider Verizon the slightly more appealing choice for investors when compared to AT&T (due to its slightly more attractive combination of dividend income and dividend growth), I have selected AT&T over Verizon for the incorporation into The Dividend Income Accelerator Portfolio.

In the following analysis about Verizon’s competitor AT&T, I have discussed in greater detail the reasons behind this decision:

AT&T: A Strategic Choice to increase Your Portfolio’s Dividend Yield and Reduce its Risk Level

Risk Factors

When it comes to risks, it can be highlighted that both Realty Income and Verizon can contribute to reducing the risk level of your investment portfolio. This theory is underlined by the fact that both companies have a 24M Beta Factor below 1. While Realty Income has a 24M Beta Factor of 0.61, Verizon’s is even lower (0.35).

However, when it comes to risks, I believe that Verizon comes attached to a higher risk level when compared to Realty Income. Verizon has a Baa1 credit rating from Moody’s, indicating a moderate risk-level. Another metric that demonstrates that Verizon investors' risk level is not particularly low is the company’s Total Debt to Equity Ratio of 188.91%. Due to the risk-level that comes attached to an investment in Verizon, I generally suggest to underweight the Verizon position in your investment portfolio.

One of the main risk factors that I see for Verizon investors is the company’s limited growth perspective: Verizon has shown a 5 Year Revenue Growth Rate [CAGR] of 0.81%, which can serve as an indicator of the company’s limited growth perspective. It further shows that investors should not expect high capital gains when investing in the company over the long-term.

I see the risk factor for Realty Income investors to be lower when compared to Verizon, which is reflected in Realty Income’s A3 credit rating from Moody’s and its high EBIT Magrin [TTM] of 40.11%, which further underscores the company’s strong Profitability. Realty Income’s diversified product portfolio of properties across different industries suggests that it can mitigate the impact of weak results in one division, with the performance of another division, reducing the risk level for investors.

I believe that Realty Income is an excellent risk/reward choice for investors, suggesting to overweight the position in a long-term investment portfolio. I am following this strategy by myself with the construction of The Dividend Income Accelerator Portfolio, in which Realty Income is one of the largest positions at this moment in time.

Conclusion

I strongly believe that both Realty Income and Verizon can be excellent options to help you generate extra income in the form of dividends and to increase the Weighted Average Dividend Yield of your investment portfolio.

I believe that both companies can provide you with an attractive mix between dividend income and dividend growth while helping you to reduce portfolio volatility.

Generally, I suggest combining high dividend yield companies with dividend growth companies to build a diversified investment portfolio with a reduced risk level, helping you to increase the probability of achieving an attractive Total Return when investing with a long investment-horizon.

This approach is reflected in the construction of The Dividend Income Accelerator Portfolio, which I am building and documenting transparently here on Seeking Alpha. The portfolio aims to provide you with stability, protection and growth in both bearish and bullish market scenarios while offering you extra income via dividend payments.

I believe that both Realty Income and Verizon can be significant pieces of a broadly diversified dividend-income oriented investment portfolio with a reduced risk level.

I suggest overweighting Realty Income in an investment portfolio, since I believe it is an excellent risk/reward choice, while I suggest underweighting Verizon due to its higher risk level (including its limited growth perspective).

Following this strategy, you can aim to achieve an attractive Total Return with a higher probability, maintaining a low risk level for your portfolio, and steadily increase your wealth while having a long-term investment focus.

Author’s Note: I would appreciate hearing your opinion on this article! Do you already own Realty Income or Verizon or do you plan to include them into your investment portfolio? If you could only choose two high dividend yield companies for this month of October, which would you select?