Dividend stocks come in all shapes and sizes, but income investors are often drawn to those with the highest yields. Unfortunately, companies that pay a monster dividend often have dwindling prospects for growth, which can lead to underperformance or even a net loss for shareholders.
With that in mind, income investors should avoid chasing high yields and instead focus on buying dividend stocks backed by thriving businesses. Stocks like that have a good shot at beating the market. For instance, Apple (AAPL -1.06%) and Walker & Dunlop (WD -1.99%) pay a quarterly consideration to shareholders, and both stocks have significantly outperformed the S&P 500 over the past five years.
Here’s what you should know.
Apple pays a scant dividend of $0.23 per share — the dividend yield is just 0.56% — but the company has upped its quarterly payout an average of 9% per year over the past decade. Better yet, Apple reportedly has new augmented reality and virtual reality (AR/VR) hardware in the works, and its high-margin services business is gaining momentum, which should turbocharge profitability in the years ahead.
Apple benefits from significant brand authority. Earlier this year, Brand Finance and Kantar recognized Apple as the most valuable brand in the world, citing an amazing level of consumer loyalty, and its reputation for quality and innovation. On that note, Apple saw its installed base of devices hit a new high across all product categories in the third quarter, which is especially impressive given that consumers are battling high inflation.
Fueled by strong demand, the company delivered a solid financial performance over the past year. Revenue climbed 12% to $387.5 billion, but earnings soared 19% to $6.06 per diluted share. Investors can attribute that rapid bottom line growth to momentum in the services segment — think App Store, Apple Pay, and subscription products like Apple TV+. The gross margin on Apple services is typically above 70%, while the gross margin on products is usually in the mid-30% range.
Turning to the future, Apple is set to become increasingly profitable as its service business grows, but investors have another reason to be excited. The company demoed its AR/VR headset for board members in May, according to Bloomberg, and analyst Ming-Chi Kuo believes Apple may launch the device in January 2023, with a pair of AR glasses to follow in 2024 or 2025.
Apple caught lightning in a bottle with the iPhone, and a successful AR/VR headset could be equally revolutionary this time around. That’s why this stock is a great fit for passive income investors.
2. Walker & Dunlop
Walker & Dunlop specializes in commercial real estate services and financing. The company originates loans, brokers the sale of debt to institutional investors, and brokers the sale of properties. Notably, most of its financing volume comes from loans originated and sold through government-sponsored enterprises like Fannie Mae and Freddie Mac. That means Walker & Dunlop bears little risk of loss, because it doesn’t keep the loans on its balance sheet.
Additionally, the company services most of the loans it originates. It also provides asset management services focused on affordable housing, which is particularly relevant given the dramatic rise in home prices over the last few years.
Today, Walker & Dunlop is the fourth-largest commercial real estate lender in the U.S., and the largest provider of capital to the multifamily industry. In spite of rising interest rates, the company turned in a relatively solid financial performance over the past year. Revenue climbed 18% to $1.4 billion and earnings were flat at $8.36 per diluted share.
The lack of earnings growth was due in large part to expenses associated with the acquisitions of Alliant Capital and GeoPhy, both of which should contribute meaningfully to growth in the coming years. Specifically, Alliant strengthens Walker & Dunlop’s position in the asset management and low-income housing markets, and GeoPhy will accelerate emerging business lines like property appraisal and small balance lending.
Looking ahead, Walker & Dunlop is well-positioned for future growth. Commercial loan origination volume will total $895 billion this year, and $418 billion of that total will go to the multifamily market. Additionally, over $400 billion in multifamily loans are expected to reach maturity between 2022 and 2026, creating a big opportunity to refinance existing loans. As the largest provider of capital to the multifamily industry in the U.S., Walker & Dunlop should benefit from those trends.
Finally, the company pays a quarterly dividend of $0.60 per share, which is equivalent 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. That’s why this dividend stock is worth buying.
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Walker & Dunlop. The Motley Fool recommends Walker & Dunlop, Inc. and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.