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The average stock on the S&P 500 index pays a dividend yield of 2.41%, but some are paying much more. Here's a chart of the 10 highest-paying dividend stocks on the S&P 500, and which ones might be the best choices to buy and hold for the long term.
Dividend yields current as of 9/23/2016.
The three best buys
Before moving on, it's important to mention that a high dividend doesn't necessarily translate into a good stock to invest in. For example, Frontier Communications (NASDAQ: FTR), the highest-paying company in the S&P 500, has struggled to turn a profit for several years now. In my opinion, it's at serious risk of a dividend cut in the near future.
With that in mind, there are a few stocks on this list worth buying. Here are my three favorites in no particular order.
1. HCP, Inc.
HCP, Inc. (NYSE: HCP) is one of the largest real estate investment trusts (REITs) specializing in healthcare properties. The company has a dividend yield of nearly 6% as of this writing, and an impressive 31-year streak of increasing its payout.
At the moment, HCP's portfolio is a mix of senior housing properties (40%), post-acute/skilled nursing facilities (26%), life science (15%), medical offices (14%), and hospital properties (5%). However, after some less-than-stellar performance from its post-acute/skilled nursing assets, the company has decided to split them off into a newly created REIT that will be called QCP.
Here's a thorough discussion of the pending spinoff, but in a nutshell, the remaining HCP portfolio will have a much higher overall quality, which will lead to the stability investors love, as well as greater financial flexibility. And the spun-off assets will be in a company whose sole focus is maximizing their value. QCP will have strategies at its disposal that are either impractical, or unavailable, while still under the umbrella of HCP.
2. Iron Mountain (NYSE: IRM)
Also a REIT, Iron Mountain (NYSE: IRM) owns and operates specialized storage facilities, and provides information protection, storage, and record management services. As of this writing, Iron Mountain has an impressive real estate portfolio consisting of 1,100 facilities located in 41 countries. In fact, the company has such a widespread presence that 94% of the Fortune 1000 are Iron Mountain customers.
Storage facilities, while they may sound like a boring business, can be one of the most exciting types of real estate from a business standpoint. They have low maintenance expenses and turnover costs, and tenant retention is generally higher than other types of properties. In fact, Iron Mountain's gross profit margin is 76.6%.
As far as the dividend is concerned, Iron Mountain's 26 consecutive years of revenue growth should help set your mind at ease. The company is currently in the midst of a pretty ambitious expansion plan, known as the "2020 vision,"and if successful, Iron Mountain projects its dividend in 2020 will be $2.54 per share. Not only would that represent a 31% increase over the current payout, but the company actually predicts that they will need to spend less of its AFFO and utilize less leverage to make it happen.
3. Ford Motor Co.
I see Ford (NYSE: F) as the riskiest stock out of the three that I'm discussing here, but it also has tremendous upside potential if the company's sales remain strong. The automotive business is a highly cyclical one, and even Ford has acknowledged that a downturn is entirely possible in the not-too-distant future.
Investors are worrying that the current business cycle has peaked, and this is the primary reason why shares trade for an absurdly low valuation of just 5.4 times trailing 12-month (TTM) earnings. However, Ford CFO Bob Shanks assured investors that it plans to offer a "secure regular dividend" through the entire business cycle, and even mentioned the plan to pay a supplemental cash dividend when cash flow allows.
The bottom line is that Ford's 4.9% dividend is safe. The company is doing a great job with capital allocation, and the $20 billion in cash on the balance sheet makes me even more confident in Ford's dividend commitment. And once sales begin to rise again, the shares have a great deal of upside potential.
The bottom line
There are some high-paying stocks on the S&P 500, but they aren't all worth owning right now. However, the three stocks discussed here offer sustainable income in addition to the possibility of market-beating growth over the long run. Any of these three would be an excellent addition to a retirement or income investing strategy.
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Matthew Frankel owns shares of HCP. The Motley Fool owns shares of and recommends Ford and ONEOK. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.