In This Article:
Key Points
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I'm a dividend investor with a penchant for buying unloved stocks with attractive dividend yields.
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Hershey is deeply out of favor for good reasons, but it is also offering a historically high yield.
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Realty Income is trading near 10-year high yields and is operating just as well as always.
No company goes through its life without facing adversity. Well-run companies can usually deal with business headwinds while continuing to reward investors well via reliable dividends.
Right now, Hershey (NYSE: HSY) and Realty Income (NYSE: O) are both dealing with some adversity, and they are offering attractive yields to investors. I happily own both. Here's why.
1. Hershey is facing a major supply issue
Hershey is a food company that makes chocolate, with its two most famous brands being its namesake Hershey and Reese's. The company faces a large problem today because cocoa prices, a key ingredient in chocolate, have gone through the roof.
Hershey is expecting revenues to remain strong in 2025, but higher costs will materially crimp earnings. First-quarter adjusted earnings fell nearly 32%. For the full year, the drop is projected to be in the mid-30% range.
That's terrible, of course, but the interesting thing is the company is projecting organic sales to be up "at least" 2%. So the company's business continues to see solid demand on the top line of its income statement -- it is just the rising cost of cocoa that is a major headwind. Still, investors are deeply worried, and the stock has fallen dramatically, pushing the yield up to a historically high 3.5%.
The thing is, high commodity prices have a way of curing themselves. The chance for large profits brings investment, which leads to increased supply, which ends up lowering prices. Cocoa comes from a tree, so the commodity cycle here is a long one. It could take a while for things to play out, but Hershey has plenty of time.
That's at least partly related to the fact that The Hershey Trust has a controlling stake in Hershey the company. Thus, the company can make long-term decisions without worrying too much about appeasing short-term-thinking investors.
The Hershey Trust basically wants the same thing I do: reliable and growing dividends from a financially strong Hershey. I believe Hershey will muddle through the current headwinds and come out the other side in one piece. I'm not losing any sleep at all worrying about commodity prices -- a problem that will, eventually, get solved.
2. Realty Income is being hit by interest rate shifts
Realty Income is a large net lease real estate investment trust (REIT). The basic model is important to understand, since REITs issue stock and take on debt to pay for property acquisitions.