Dividend stocks often get a bad rap as being boring, stodgy companies that offer stability but little in the way of market-beating returns. It’s true. Many traditional dividend payers tend to be mature, slower-growing companies that fail to keep pace with broader market indexes. That’s why investors often view such companies as portfolio stabilizers, providing steady income through thick and thin. But reinvesting those dividends year after year in laggards does little to juice your overall returns.
However, it doesn’t have to be this way. You can absolutely find dividend stocks with both high current yields and strong future growth potential. The key is looking for companies with durable competitive advantages poised to benefit from long-term megatrends.
Investing in companies with oversized dividends definitely comes with its fair share of risks, but over many years, this strategy can significantly compound your returns. Investors receive both a growing income stream as well as any capital appreciation on top of that. It’s like getting two layers of compounding working in your favor.
With that said, let’s look at three dividend stocks with the potential to provide this kind of compounding over time.
Global Ship Lease (GSL)
Global Ship Lease (NYSE:GSL) has been one of the biggest beneficiaries of the boom in container shipping over the past couple of years. The company was in a great position to capitalize on the huge surge in container shipping rates brought on by the pandemic. Now, while rates have started to moderate from their peaks in 2021, GSL stock still remains substantially higher than pre-pandemic levels. The company has locked in many multi-year charter agreements over the past two years that allow it to reap these elevated rates for a prolonged period.
In my view, Global Ship Lease offers an attractive mix of high cash flow visibility and upside potential. With most of its capacity tied up on multi-year charters, the company has clear near-term earnings power. Yet it also has upside exposure if container rates rise again, whether due to further supply chain turmoil or geopolitical tensions.
Looking ahead, I see geopolitics as a potential catalyst for Global Ship Lease. With tensions simmering in places like the Middle East, we could see key shipping routes get disrupted. For example, recent Houthi rebel attacks on ships in the Red Sea bear monitoring. Any flare-ups could restrict flows through this strategically vital shipping lane. With the Red Sea-Suez Canal path already prone to periodic disruptions, companies like Global Ship Lease, with global shipping assets, have an advantage. They can nimbly redeploy capacity if needed.
Its dividend yield isn’t above 10%, but GSL’s shareholder yield (factoring in its generous dividend and share repurchases) is quite substantial at around 35%. This is tremendously high considering its cash flow visibility, and combined with a dividend yield of 8.4%, Global Ship Lease has proven its ability to return capital to shareholders, which is better than a 10% yield.
Sociedad Quimica y Minera de Chile (SQM)
Turning to the lithium space, Sociedad Quimica y Minera de Chile (NYSE:SQM) is a standout pick in my view. As one of the world’s largest lithium producers, SQM provides exposure to (potentially) surging lithium demand driven by the EV revolution. That said, its valuation has become much more reasonable after lithium stocks retreated from their frothy 2021 highs.
Lithium prices themselves have also pulled back this year, which has weighed on SQM’s stock price. However, I don’t believe today’s lithium pricing reflects the commodity’s strong long-term outlook. Demand seems poised to grow at a 20%+ clip for many years as EVs gain market share. Meanwhile, ramping up lithium production capacity takes time and investment. Mismatches in supply and demand can readily occur, causing lithium prices to spike.
In my opinion, SQM’s sheer size and production cost advantages position it well to ride the lithium wave at an attractive valuation now. The stock has declined by more than 34% in 2023 as the correction in lithium prices shook out some of the froth. With SQM stock now trading at just 6.4-times earnings, I think the risk-reward with this investment is skewed positive. Especially with its dividend yield approaching 15%, the stock seems attractively valued for long-term investors.
SQM’s dividend also has ample room for growth, in my view. The lithium markets still look tight, especially with EV demand running slightly cold. But SQM’s production is highly cost-competitive, which should allow its margins to remain strong through future lithium price swings. As its cash flows expand, I expect SQM to share more of the spoils with shareholders via higher dividends.
This dividend growth won’t necessarily come in a straight line, however. Lithium prices and margins may fluctuate year-to-year, temporarily impacting SQM’s dividend-paying capacity. But over a five to 10-year horizon, SQM seems capable of at least maintaining its hearty dividend with room for growth.
Bancolombia (NYSE:CIB) is an intriguing turnaround play. Colombia’s largest bank has seen its stock languish amidst rising risks in Latin America. But with Colombian inflation potentially peaking and the economy set to reaccelerate, I believe Bancolombia could outperform in 2023.
Bancolombia possesses a dominant market share and a strong deposit franchise. After boosting provisions last year, it appears poised to ride Colombia’s economic recovery under new leadership. With its forward dividend yield at 11%, Bancolombia offers income investors exposure to this rebound potential at an attractive valuation.
Loan growth should pick back up for Bancolombia as domestic demand recovers and the peso stabilizes. Meanwhile, higher rates will provide a boost to net interest margins after a period of compression. With its asset sensitivity, Bancolombia stands ready to capitalize on a more constructive rate environment.
In addition, provisioning costs are also trending lower after spiking in 2022, setting the stage for higher profitability. While risks remain elevated given Colombia’s challenges, I believe markets have priced in the bulk of the downside. Investors are now positioned for an upside surprise if the economy turns sooner than expected.
To me, Bancolombia seems deeply oversold at just 0.6-times book value and 4-times earnings. Its dominant franchise and strong funding base should allow it to withstand the headwinds of its domestic economy. Meanwhile, investors get paid handsomely to wait, via the stock’s double-digit dividend yield.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.