3 Dividend Stocks Built to Last a Lifetime

Business Development Corporations (BDCs), Dividend Investing, High-Yield Investing, Real Estate Investment Trusts (REITs)

While there’s no way to predict the next market crash or even the next market boom, building a portfolio to last a lifetime means owning stocks that will thrive no matter what the market does. Here are three dividend stocks you can count on for their steady dividend payments that should increase over time. 

I spend a lot of time speaking with my newsletter subscribers and other investors about developing an income-focused mindset to generate positive returns and manage the volatility in the stock market. Investing to build a dividend income stream allows investors to view share prices differently.

The key to a successful dividend-centric investment strategy is to build core portfolio holdings of solid, stable dividend stocks. These are companies you can count on to pay dividends no matter what is happening in the stock market.

There are several factors that I look for in a core holding dividend income stock. I build a picture of a company’s business operations to see if financial results generate enough steady free cash flow to support the dividend. I also want to see the cash flow per share grow over time. A growing cash flow per share builds a cash cushion to protect the current dividend rate and should lead to dividend increases in the future.

You will find that companies with growing cash flow but a very high yield on the share price will be reluctant to increase dividend rates. That can be OK as long as the yield represents an attractive return on investment.

One type of income stock to watch for and avoid is an organization that aggressively grows revenue (usually through acquisitions) without generating a corresponding rate of growth in the free cash flow per share. Many of the high-yield stocks publicly traded are of companies that operate using a pass-through tax structure.

SEE ALSO: How to Collect $3,477 in Extra Income By January 16th

This structure allows a company to not pay corporate income taxes as long as most of the net income, usually around 90%, is paid out to investors as dividends. For a pass-through business to grow, it will issue new shares and debt to pay for acquisitions. If a company is issuing lots of new shares, buying assets, growing revenue and not growing net cash flow per share, you are looking at a business that is being run to enrich the management team and not the shareholders.

Issuing equity (shares) is part of the business model for pass through companies. However, the new capital must be put to work to increase the cash flow per share for the new, higher amounts of shares outstanding. This is often referred to as accretive per share business growth.

vnqAn income stock portfolio needs some core holdings of shares that have the safest possible dividend payments and still sport attractive yields. As a benchmark, the 4.1% yield on the Vanguard REIT Index Fund (NYSEARCA: VNQ) gives us something to compare individual stocks against, yield-wise. Here are three stocks for your consideration:

mainMain Street Capital Corporation (NYSE:MAIN) is far and away the best-in-class of stocks that operate as business development companies (BDCs). A BDC makes equity investments and debt loans to small to medium sized corporations. This is viewed as important to the economy, so BDCs operate as pass-through businesses under special tax rules.

Most BDC stocks pay high yields, but have trouble generating enough cash flow to support their dividends over time. Dividend reductions are common in the sector. In contrast, MAIN has steadily increased its dividend since going public in 2007. The current monthly dividend rate is 66% higher than what the company was paying at the end of 2007.

Since 2013, MAIN has also paid supplemental dividends out of extra profits. You may see other reports that state MAIN is over valued with its shares trading at 1.5 times book value. The high share valuation actually makes the company stronger.

For example, MAIN could issue $1 million worth of shares and then use that money to buy $1.5 million of assets. That will definitely be accretive for shareholders. MAIN is the case of a business where the strong will just get stronger. The stock currently yields 6.1% not including special dividend payments.

ayrAircastle Limited (NYSE:AYR) is a finance company that owns a fleet of commercial aircrafts. These planes are leased out to airlines all over the world. Aircastle is a tremendously profitable company that generates a large amount of free cash flow.

Earnings per share do not tell the company’s full story, and to see the true potential of AYR, you must look to how they generate cash. To find out the cash flow, you start with earnings before interest, tax, depreciation, and amortization, or as it’s referred to, EBITDA. Then add back in the non-cash items of depreciation and amortization to get free cash flow.

For 2016, Aircastle will generate about $5.50 per share per year in cash flow. Out of that, the current annual dividend is $1.04 per share. You can see this dividend is safely covered. Over the past several years, the AYR dividend has been increased by 6% to 8% each year. You can expect those increases to continue.

Despite the company’s strong financial results, the AYR share price can be very volatile. The best way to get this stock in your portfolio is to add shares when the shares yield above 5%. The share price always recovers, giving you some capital gains as well as an attractive growing dividend income. AYR currently yields 4.9%.

mgpMGM Growth Properties LLC (NYSE:MGP) is a new real estate investment trust (REIT) that was spun-off by the gaming company, MGM Resorts International (NYSE:MGM), with an April 2016 IPO. The REIT owns the real estate (ground and hotels) of 10 of MGM’s gaming resorts. MGM Growth Properties has a very high level of revenue and cash flow security due to the master lease between MGM and MGP.

MGM pays a single lease payment to MGM Growth Properties. The gaming company cannot decide to put one resort into bankruptcy to get out of making its lease payments. The master lease payment amount is well covered by MGM’s business results. To put this in a better perspective, in its worst year out of the last decade, the EBITDA generated by MGM provided more than two times coverage of the payment to MGP.

Currently, the MGM annual EBITDA covers its payment to MGP by close to four times. The current 6.3% yield on MGP is very attractive for a REIT of this quality. I would expect the yield to come down over time as the stock gets discovered and the share price is driven higher by investor buying.

Stocks like the three above will be great places for any income investor to begin building a portfolio of income stocks that they can count on to provide them with a steady stream of income that has the potential to grow every year.

Stocks that have high current yields and the potential for dividend growth are an integral part of my income investing strategy that I share in my newsletter, The Dividend Hunter. This is where I recommend the market’s strongest, most stable high-yield dividend payers, and there are 20 high-yield stocks currently available through my Monthly Dividend Paycheck Calendar system for generating a high monthly income stream from the market’s most stable high-yield stocks.