2 Magnificent S&P 500 Dividend Stocks Down 24% to 50% to Buy and Hold Forever

Investors often turn to dividend stocks as a source of income, though they face a conundrum: Higher-paying dividend stocks also tend to come with a higher level of risk. With S&P 500 stocks paying an average dividend of under 1.2%, many investors will often turn to other investment vehicles for income.

Fortunately, a few of these stocks offer dividend yields far above the S&P 500's average without the degree of risk that the higher dividend yields might imply. These stocks can not only provide a cash return comparable to bank certificates of deposit, but they can also offer an opportunity to beat the market long term with their potential for stock-price appreciation.

1. Realty Income

Realty Income (NYSE: O) bills itself as the "monthly dividend company." The real estate investment trust (REIT) owns more than 15,600 single-tenant, net-leased properties. This means it doesn't have to pay income tax on its operational income, assuming it pays out more than 90% of its net income in the form of dividends. Also, the net-leasing arrangement means the tenant pays the insurance, maintenance, and property tax expenses, giving the company a steady stream of revenue.

Investors will like that the company's monthly dividend has risen at least once per year since its inception in 1994. Offering a current annual dividend of over $3.23 per share, Realty Income pays a cash return of over 5.3%.

Due to the pandemic and the rising-interest-rate environment earlier in the decade, Realty Income struggled. Even though the company bought and developed properties in that environment, investors soured on the stock, and it now sells at a discount of around 24% from its high in early 2020.

Nonetheless, interest rates are again on the decline. This should allow the company to reduce interest costs and give it more favorable conditions to expand. Also, Realty Income has earned $4.11 per share in funds from operations (FFO) income, a measure of its free cash flow. This means it trades at about 15 times its FFO income.

Investors should also note that the monthly payout rose five times over the last year. During such conditions, Realty Income is poised not only for a high and growing dividend, but also the potential for stock-price appreciation.

2. Clorox

Clorox (NYSE: CLX) is one of many stocks trying to recapture the gains it earned during the pandemic. It's best known for Clorox bleach, but also owns brands such as Glad, Kingsford, Pine-Sol, and Hidden Valley. Not surprisingly, its cleaning products were in high demand early in the decade as consumers became obsessed with protecting themselves from COVID-19.

Unfortunately, like many pandemic stocks, Clorox plunged when worries about the contagion abated and demand for its products dropped. Additionally, in 2023, a cyberattack disrupted the company's supply chain, forcing it to adopt manual ordering processes and leading to shortages in stores.

Amid the company's challenges, its stock has trended downward since late 2020 and is again approaching lows last seen during the aftermath of the cyberattack. Consequently, Clorox stock trades at an approximate 50% discount to its all-time high more than five years ago.

Nonetheless, this plays into the hand of dividend investors. Clorox currently sells at a price-to-earnings ratio (P/E) of 18, well below the average 31 P/E for the S&P 500. However, the declines haven't disrupted years of dividend increases.

As a result, the company's $4.96 per-share annual payout offers a dividend yield of just over 4.1%, approximately doubling the yield from five years ago. This payout will pay investors to wait as the company transitions to a new enterprise resource planning (ERP) system to update its operations.

Clorox is unlikely to excite investors, who may look for signs of the ERP system improving efficiencies before buying the stock. Still, for investors seeking high-paying dividends and considerable potential for stock-price appreciation, Clorox stock could clean up longer term.

Will Healy has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.