Everywhere you look, there’s a subscription service begging for your attention: from Netflix (NFLX) to cable TV … and even a Hot Sauce of the Month Club.
Pretty well everyone has at least one, and many folks have several. One study showed that 7% of American households have six or more services for video alone!
There’s a reason why companies charge recurring revenues, of course. It’s a great business model to hit up our credit cards monthly.
But great businesses don’t always translate to rewarding stocks. We contrarian dividend seekers tend to steer clear of the streamers because:
- They pay no dividends!
- There’s zero certainty, despite their seemingly predictable revenue streams: I’m sure you know of folks who dial into a streaming service, binge their favorite show and then check out. You’ve likely done this yourself.
But there is another way for us to tap “recurring revenue” stocks for sturdy payouts that shrug off a market crash: we’re going to look for companies that are either tied to surging megatrends or forgo fickle consumers entirely and focus on much more reliable clients: other companies.
Corporate business is, after all, more “sticky”: once a company commits to a certain provider, be it for back-office functions, health benefits or cloud platforms, they tend to stick around. It’s just too costly and time-consuming to switch.
You can find the best “recurring revenue” buys by looking out for four “must haves” (besides a top-quality product clients can’t live without, of course!):
- A growing dividend, which tends to pull a company’s share price higher. In times of crisis, a rising payout is a sign of a healthy business, which draws frightened investors in.
- Rising profits (and better yet free cash flow, a snapshot of cash generation that can’t be manipulated) to back that rising payout and, in turn, our upside.
- A safe payout ratio: I demand that “regular” stocks (i.e., those outside the real estate investment trust market) pay no more than 50% of free cash flow as dividends.
- A large slice of its market, so there are fewer competitors to switch to!
Add all four together and you get an excellent shot at long-term profits (and rising dividends!). We saw this in action at my Hidden Yields service, when we bought cell-tower “landlord” American Tower (AMT) in November 2018.
We’ve written about cell-tower firms like AMT many times in the last few years, and with good reason: for one, AMT, along with Crown Castle (CCI) and SBA Communications (SBAC) are basically an oligopoly that controls the nation’s cell-tower infrastructure between the three of them.
If you’re AT&T (T), Verizon Communications (VZ) or T-Mobile US (TMUS), you pretty well have to do business with one of the three cell-tower kingpins. AMT counts all three of the major telcos as “subscribers,” as you can see below.
And talk about “sticky” business: AMT’s leases are typically non-cancellable and run for five to 10-year terms, with yearly escalators built in.
We loved AMT because it’s a “pass-through” company, taking the revenue it collects from new leases and those yearly “escalators” and passing them on to investors in the form of a dividend that rises every quarter, just as it did through our two-and-a-half year holding period:
Soaring “Recurring Revenue” Translates Into Gains and Upside
NextEra Energy: Another Strong “Recurring Revenue” Play
Utilities are the ultimate recurring-revenue stocks, and they’re recession-proof, too: because no matter what happens with the economy, the utility bill must be paid.
That’s a good reason to buy a stock like NextEra Energy (NEE). Plus, the stock matches up perfectly with our four “must haves”: on the market-share front, NEE’s regulated Florida Power & Light subsidiary is the state’s biggest utility, serving five million households.
NEE is also the largest developer of renewable energy in North America. This combo of steady income from its regulated operations and growth from the renewable side has translated into a dividend that’s soared 53% in the last five years.
In its latest quarter, EPS jumped 13%, and management says continued strong earnings will let the company juice its dividend by 10% annually at least through 2024, using this year as a base.
That strength is largely on the back of NextEra’s renewables pipeline: just from July to late October, NEE added 2.1 billion gigawatts to its backlog and is now sitting on about 20 billion worth. As these projects roll out, they’ll power NEE’s earnings, which is why the company expects those yearly 10% dividend increases.
Now let’s talk about NEE’s Dividend Magnet, because it’s definitely worked its magic on the share price—in fact, it may have worked a little too well, as the price has more than doubled up the company’s share-price growth in the past five years:
NEE’s Share Price Overpowers Its Dividend
— Brett Owens
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Right now, three monthly payers are flashing BUY signals. And I’m talking annual yields above 12%. I’ve put all of my research into an exclusive monthly dividend report—please click here to read it now.
Source: Contrarian Outlook
