Investors often try to get rich quick, buying shares of stocks that are rocketing higher. The problem is that those stocks sometimes flame out in the end. A more reliable way to build generational wealth is to have a strong foundation of boring, reliable companies. It’s even better if those companies pay dividends that can be reinvested over time.
Right now, you might want to consider “sleep-well-at-night” companies like Realty Income (O) and Unilever (UL).
Realty Income is huge and has a high yield
The biggest attraction for Realty Income right now is probably the real estate investment trust’s (REIT’s) 5.8% dividend yield. That’s near the highest levels of the past decade and far above the scant 1.3% on offer from the S&P 500 index. You can use the monthly dividend to pay for living expenses, or reinvest it to compound your growth over time.
Realty Income is the largest net lease REIT by a wide margin. Its next closest peer is less than a third the size. Net leases require this landlord’s tenants to pay for most property level operating costs, which helps to reduce risk for Realty Income. The company’s 15,400 properties and investment grade rated balance sheet further lower the REIT’s risk profile.
But what really sets Realty Income apart from peers is its access to capital. That is tied directly to the REIT’s size, which makes it easier to sell both debt and shares. With a generally low cost of capital, Realty Income can be more aggressive with acquisitions and still make solid profits. While investors shouldn’t expect rapid growth (its vast size limits that), slow and steady is likely to be the name of the game for years to come as Realty Income continues to buy properties in the U.S. and in Europe.
The three-decade-long dividend streak here looks like it has plenty more years to run, helping shareholders build wealth that can be passed on to the next generation even as you benefit from that income today.
Unilever is shifting its business around
Unilever is one of the largest and oldest consumer staples companies on the planet. Its dividend yield today is roughly 3.3%. That’s about middle of the road for the company over the past decade or so. But the real story is the potential for the future.
First, Unilever has been a bit of a laggard relative to peers. That’s not great, but management is working on the problem. A lot has changed, and there’s still more to come. Notably, the company transitioned from an odd dual listing structure to being listed only in the United Kingdom, which simplified the business. It has also been working on weeding out slow-growth businesses, like tea, so it can focus on faster-growing operations via bolt-on acquisitions, such as Liquid IV.
The next big change is going to be jettisoning the ice cream business, which doesn’t share many similarities with the rest of the company’s operations. Helping this process along is activist investor Nelson Peltz, who helped to turn around peer Procter & Gamble not too long ago. So there’s a turnaround story here.
But there’s more here that long-term investors need to know. Emerging markets make up around 60% of the company’s top line. Although developed markets are more reliable performers, they also tend to be slower-growing. Having a heavy weighting in emerging markets should give Unilever a long-term growth edge over its competition. If you are thinking in decades, which is what creates generational wealth, getting some consumer staples exposure in up-and-coming markets should be very appealing to you.
Today isn’t the story — the story is tomorrow
To be fair, neither Realty Income nor Unilever are exactly firing on all cylinders right now. And neither of these companies is likely to wow you with growth, either. But they have proven over and over again that they know how to thrive over the long term. And there are aspects of each that suggest that they will be able to continue rewarding investors with slow and reliable growth for years to come. That’s how you build wealth that you can pass on to your heirs.
— Reuben Gregg Brewer
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Source: The Motley Fool