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All Contents © 2020The Kiplinger Washington Editors
By Charles Lewis Sizemore, CFA, Contributing Writer
| August 15, 2019
High-yield dividend stocks have gained even more allure lately in the face of shrinking bond yields. However, while a handful are ready buys right now, several more sport alluring yields – at least 5%, and up into the double digits – but need a little more time to simmer before it’s time to dip in.
Patience is a virtue in life. That’s particularly true in the investing world. It’s even true across investing disciplines. Sober value investors wait for their price before buying, but disciplined market technicians also know to wait for the proper setup before trading.
Sometimes, you need to wait for a fundamental catalyst to make your trade worth making. Other times, it’s simply a matter of waiting for the right price. But the key is having the self-control to wait for your moment. Lack of patience can be a portfolio killer.
“We tell our clients during the onboarding process that we won’t be investing their entire portfolio on day one,” explains Chase Robertson, Managing Partner of Houston-based RIA Robertson Wealth Management. “We tend to average into our portfolios over time as market conditions warrant, and we’re not opposed to having large cash positions. Our clients thank us in the end.”
Today, we’re going to look at 13 high-yield dividend stocks to keep on your watch list. All are stocks yielding over 5% that you probably could buy today, but all have their own unique quirks that might make it more prudent to watch them a little longer rather than jump in with both feet.
Data is as of Aug. 14. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $39.9 billion
Dividend yield: 6.0%
In the company’s own words, casino operator Las Vegas Sands (LVS, $51.79) is the “global leader in integrated resort development and operation.”
While that might sound like a grand claim, it’s hard to argue. The company owns a vast portfolio of gaming hotels and resorts in the United States and Asia. Some of its iconic properties include the Venetian Resort Hotel Casino on the Las Vegas Strip, the Venetian Macao Resort Hotel, the Plaza Macao and Four Seasons Hotel Macao, among others.
Las Vegas Sands isn’t just a high-yield dividend stock – it’s a payout growth machine, too. The company has hiked its cash distribution at a 17.4% annualized clip between 2012 and the first half of 2019.
Las Vegas Sands’ greatest strength over the past decade has, unfortunately, become its greatest weakness today. The company gets the lion’s share of its revenues and earnings from Asia, and specifically China. As of the second quarter, 61% of LVS’s earnings before interest, taxes, depreciation and amortization (EBITDA) came from the Chinese territory of Macao, with another 27% coming from Singapore. A paltry 12% came from its investments in the United States.
An intrepid investor could snap up some shares of LVS today, as the shares are already down about 23% from their 52-week highs. But much has changed in just the month since we highlighted its cash-generating qualities. Given the political unrest in neighboring Hong Kong and the unpredictable effects of the ongoing trade war, it might be prudent to put the stock on your list of stocks to watch for now instead.
Market value: $6.5 billion
Dividend yield: 8.3%
Starwood Property Trust (STWD, $23.07) is a mortgage real estate investment trust (mREIT), sporting an attractive 8.2% yield.
Mortgage REITs have been a difficult asset class to trade in recent years. They effectively play the so-called carry trade, borrowing short-term and using the proceeds to buy higher-yielding, longer-dated mortgage securities. For years, higher short-term borrowing costs (because the Federal Reserve was raising interest rates) have crimped returns, and many mREITs were forced to lower their dividends as a result. Furthermore, fears that the housing market may be overheated have made some investors wary of mortgage products, which has sapped demand for mortgage REITs.
This is where Starwood gets interesting. The Federal Reserve has changed course and has started to lower interest rates, albeit grudgingly. In his last press conference, Chairman Jerome Powell indicated that his 0.25% reduction was a “mid-cycle adjustment” rather than a wholehearted embrace of lower rates.
We’ll see. Fed hawkishness last year was a major driver of the fourth-quarter selloff, and Powell will want to avoid a repeat of that. So, further rate-reductions are likely, particularly given that central bank rates are negative in much of the rest of the developed world.
Lower rates would be a boon to leveraged mortgage REITs like Starwood. Though it might be more prudent to wait for Powell to show his cards before making a major new investment.
Interestingly, while part of Starwood’s portfolio is invested in residential mortgage-backed securities (MBSes), the bulk of its portfolio is in commercial and infrastructure lending, as well as commercial MBSes. So, while most mortgage REITs are tied to the housing market, Starwood is far more tied to the commercial real estate market. That’s neither good nor bad, but it is something to consider before buying. If you’re bearish on commercial real estate, you might want to be patient and wait for your moment before striking.
Courtesy Branson Convention and Visitors Bureau via Flickr
Market value: $1.4 billion
Dividend yield: 9.6%
Traditional suburban malls are in decline, under constant attack from changing consumer tastes and from the relentless growth of Amazon.com and other online retailers.
But outlet malls are a different story. Outlet malls tend to occupy cheaper land on the fringes of major cities, and they generally require less in the way of construction build out. They also tend to be shopping “destinations.” You generally don’t drive all the way to an outlet mall to buy a single sweater or a pair of shoes. You go to make a day of it, and many outlet malls tend to cater to tourists who drive into town specifically to shop at the outlet mall. No retail format can truly claim to be “Amazon-proof,” but outlet malls are as close as you can reasonably get.
This brings us to Tanger Factory Outlet (SKT, $14.80). This REIT owns 39 upscale outlet shopping centers spread across 20 states and Canada totaling over 14 million square feet of retail space. It counts Nike (NKE), Under Armour (UAA) and Ralph Lauren (RL) among its largest tenants, though its largest single tenant accounts for less than 7% of its total rents.
A wave of retail bankruptcies in recent years has made investors wary of retail and mall REITs. And in an outright recession, Tanger would almost certainly see its occupancy rate drop from its current 96%. But once the dust settled, Tanger likely would be one of the first to rebound. The outlet mall is simply too important as distribution channel for most clothing and apparel brands.
Tanger has climbed into the ranks of truly high-yield dividend stocks in large part because shares have been trending lower for three years now. As a result, the company now yields close to 10%. That means anyone considering buying today is effectively trying to catch that proverbial falling knife.
Instead, investors should wait for profits and occupancy to stabilize before trying their luck with this one.
Market value: $35.9 billion
Dividend yield: 6.7%
Automakers have been a tricky sector to navigate in recent years. Investors have been enamored with electric vehicle makers like Tesla (TSLA), and for good reason. Though still profitless, Tesla boasts impressive autonomous driving technology, and the company stands to benefit from government mandates to reduce the use of fossil fuels.
The emphasis on electric cars has turned traditional automakers like Ford (F, $9.00) into something of a pariah of late. But the bigger factor weighing on the stock price is simply that we are now late in the economic cycle, and past “peak auto.” With the yield curve spending a good part of this year inverted, chances are good that we get at least a mild recession within the next year or two. Auto sales tend to fall precipitously during recessions.
Ford is a truly cheap stock. It trades at less than seven times analysts’ expectations of future profits (less than half as pricey as Standard & Poor’s 500-stock index), and it yields well north of 6%. And despite its reputation, Ford is hardly the dinosaur legacy automaker that many investors believe it to be. It’s a major investor in electric truck maker Rivian, and the company will soon be selling an all-electric F-150. Goldman Sachs even calls it a Strong Buy right this very minute.
All the same, it might be wise to wait for an economic slowdown and the slide in Ford’s stock price that would likely follow. While the stock is cheap today, it might be even cheaper (and closer to a true bottom) a year from now.
Market value: $1.0 billion
Dividend yield: 8.6%
Retail has been a treacherous place to invest in recent years. Even in a strong economy, 2017 saw more than 20 major retail bankruptcies, including major players such as Toys R Us. More than a dozen significant retailers filed for bankruptcy in 2018, including Sears, David’s Bridal and Mattress Firm. And 2019 hasn’t seen much of a respite, with over 15 major retailers pushed into bankruptcy so far, including Gymboree and Barney’s New York.
Home goods retailer Bed Bath & Beyond (BBBY, $7.88) isn’t in danger of going out of business in the immediate future. But the company has struggled of late and announced earlier this year that it would be closing at least 40 stores. Relentless growth from online competitors like Amazon.com (AMZN) and stepped-up competition from Target (TGT), Walmart (WMT) and other mass-market brick-and-mortar retailers have made for a difficult competitive landscape. And all of this at a time when the economy is actually growing at a nice clip.
BBBY shares have tanked by around 90% since 2015, which has pushed its dividend yield north of 8%. But there are reasons to believe the bloodletting might be over – among them, a trio of activist investors recently forced some changes to the board of directors and management team.
But before you rush in, you might want to give the new team at least a few quarters under their belt. Retail is a brutal business even during calmer times. A little patience here would only be prudent.
Market value: $85.7 billion
Dividend yield: 7.0%
The high-yield dividend stocks of the tobacco industry have been resilient survivors during the past 50 years. While smoking rates have plummeted around the world, the major brands have managed to stay relevant by raising prices and cutting costs.
The best-run operators, such as Marlboro maker Altria (MO, $45.87), have managed to chug along despite a difficult environment and have managed to reward their patient shareholders with regular dividend hikes. Altria has hiked its dividend every year without interruption for nearly half a century, and the shares yield an attractive 7% at current prices.
All the same, the popularity of vaping has come as a new shock to the industry. Nielsen reported annualized volume declines of 3.5% to 5% throughout 2018. But the declines have accelerated this year, and recent Nielsen data saw volumes declining at an 11.5% rate during one four-week stretch this past spring.
Big Tobacco benefits from the popularity of vaping, but margins tend to be smaller than on traditional cigarettes. Furthermore, there is a growing concern that much of the growth in vaping is due to underage smokers picking up the habit. The U.S. Food and Drug Administration has stepped up its regulation and has gone so far as to order some vaping products removed from store shelves.
It remains to be seen how hard the regulators crack down or if traditional cigarette volumes continue to shrink at an accelerated pace. Like Ford, Goldman likes Altria right now. But it might make sense to watch Altria and the other Big Tobacco players for another quarter or two before committing. The shares have been in near-continuous decline since 2017, and trying to catch a proverbial falling knife is a good way to cut your hands.
Market value: $37.2 billion
Bank stocks have been pariahs ever since the 2008 meltdown, and European banks have looked even more rickety than their American peers. With interest rates stuck in the gutter for most of the past decade – and with most banks being forced to reduce their risk taking following the crash – banks simply haven’t been as profitable as they used to be.
Long suffering financial-stock shareholders got just a hint of optimism when it looked like the world’s central banks were dead set on raising interest rates and tightening policy a year ago. But with growth no slowing, those hopes are long gone. Central banks are cutting rates again, which is a major headwind for bank profitability.
However, at some point, a stock gets simply too cheap to ignore, and Swiss bank UBS Group (UBS, $10.16) is getting awfully close. UBS trades at 7.5 times forward earnings and yields a whopping 6.7%.
With Brexit looming and with the possibility of a global recession on the horizon, it might make sense to watch UBS for a while before pulling the trigger. There’s an unusually large number of macro events that could really blow up the banking sector at the moment, so there’s no need to rush in.
Market value: $1.1 billion
Dividend yield: 7.5%
Retail isn’t the only industry to be disrupted by the internet. Between piracy, the availability of cheap, large-screen TVs and the limitless amount of content to stream via Netflix (NFLX) and other services, the movie theater simply isn’t the draw it used to be.
Furthermore, sales today tend to be lumpier and more dependent on blockbuster sequels, reboots and superhero franchises. If today is a new golden era for TV programming, it’s something of a swoon for movies.
All of this has weighed on the price of AMC Entertainment (AMC, $10.75), which owns a chain of 637 theaters with 8,114 screens in the United States and another 369 theaters with 2,977 screens internationally.
Making a difficult situation worse, AMC has seen its debt levels explode in recent years as it went on a consolidation spree, and it has lost money in two of the past three years. Not surprisingly, the shares have lost almost 70% of their value since the end of 2016.
The continued pounding in shares has resulted in a yield north of 7%. But perhaps AMC can weather the storm. It was one of the first chains to go higher-end, installing luxury recliners in many of its theaters to compete with the likes of Alamo Drafthouse. And the company continues to innovate. In its most recent earnings call, AMC said it was considering using its theaters to broadcast live sporting events. Imagine having a Super Bowl party in the movie theater.
All the same, it might be wise to give this stock a quarter or two to find its legs. The shares have been in almost continuous decline for nearly three years, and in fact, we flagged it as a dangerous dividend play a year ago. You could have gone broke trying to call that bottom. For now, wait for signs of a real turnaround.
Market value: $3.5 billion
Dividend yield: 17.8%
Investors have been wary of the energy sector ever since the steep selloff of 2014-16. Even midstream pipeline companies – high-yield dividend stocks that merely transported commodities, and thus were thought to be immune to price swings in crude oil and natural gas – took their lumps. Once bitten, twice shy, investors fled the sector and have been reluctant to return.
Given the volatility in the energy sector again in 2019, that’s not an unreasonable sentiment. But plenty of energy stocks are worth keeping an eye on.
One in particular is Antero Midstream (AM, $6.90). Antero owns and operates pipeline assets serving two of the lowest-cost natural gas and natural gas liquids (NGL) basins in North America: the Marcellus and Utica shales. Antero is a relatively small player, with a little more than 300 miles of gathering pipelines and 275 miles of freshwater pipelines. But the company is growing like a weed, and at current prices, it yields a whopping 17.04%.
A distribution yield that high simply isn’t sustainable, as it means a punishingly high cost of capital. So, either Antero’s share price needs to recover … or the distribution needs to be cut.
An intrepid investor might be willing to wade in today at current prices. After all, the company raised its distribution as recently as July, and in the company’s last earnings call, management indicated the distribution was safe for the foreseeable future.
Still, it might be prudent to wait another quarter or two. Continued weakness in natural gas pricing may cause Antero Midstream’s partner, Antero Resources (AR), to scale back production, which could potentially slash Antero Midstream’s income. For now, put this company on your list of stocks to watch.
Market value: $8.8 billion
Dividend yield: 8.0%
For a stodgy document storage company, Iron Mountain (IRM, $30.61) has been surprisingly adept at pushing the envelope. It convinced the IRS to accept its conversion to a REIT back in 2014 despite the fact that its activities as a landlord are questionable at best. Its countless racks stacked to the sky with document boxes certainly have little in common with apartment or office buildings.
Still, the move allowed the company to avoid corporate income tax, and it now sports a robust dividend yield of 8.0%.
Investors have been viewing Iron Mountain with an increasingly skeptical eye, as there are fears that the move to digitization by companies will crimp growth. This is true, of course, but large enterprises also tend to be slow to make major changes, and the cash flows from Iron Mountain’s existing clients is sticky.
Furthermore, the company isn’t resting on its laurels. Iron Mountain is busily expanding into data centers and cloud storage and is also expanding its presence overseas.
Iron Mountain has trended lower for most of 2019, so investors may want to wait for an uptrend before committing capital. And with bond yields plunging to new lows, they might not want to wait for too long on this “boring but beautiful business.” High-yield dividend stocks like IRM won’t go unnoticed in this environment forever.
Market value: $18.3 billion
Dividend yield: 5.6%
Weyerhaeuser (WY, $24.50) is one of the oldest and most successful timber REITs. It’s also historically been a high yielder and currently yields about 5.5%.
Timber has unique qualities that very few other asset classes have. It’s cyclical, and when construction slows, so does demand for fresh lumber. But here’s the thing: Trees don’t just sit there. They grow. So, during stretches of low demand, unharvested timberland actually becomes more valuable as the trees continue to mature.
That’s a great long-term investment thesis. But it’s the short-term twists and bends that will give you heartburn. During the 2008 meltdown, Weyerhaeuser’s stock price lost 80% of its value. During the 2000-02 bear market, it lost about 30% of its value.
With the economy potentially slowing and the trade war with China lingering, it might make sense to be patient in Weyerhaeuser and wait for a significant pullback.
Market value: $93.5 billion
Pharmaceuticals are a tough business these days. Between patent expirations, pushback from government regulators and insurance companies, and an aging population of patients that are tapped out financially, this is one of the most challenging environments in recent memory.
Not surprisingly, AbbVie (ABBV, $63.50) has had a rough ride. Apart from the factors plaguing the rest of the industry, it also is staring at a ticking patent-cliff clock for blockbuster drug Humira, and Wall Street hasn’t been particularly receptive to the company’s recent purchase of Botox maker Allergan. The shares have been in decline for most of 2019 and are more than 35% below their 52-week highs. Meanwhile, the dividend yield has crept up and is now sitting at a lofty 6.7%.
AbbVie trades at a ridiculously cheap 6.9 times forward earnings. At that price, there’s probably not a lot of downside left in the stock. Furthermore, if the economy really is starting to get shaky, pharma stocks such as ABBV are considered defensive plays. AbbVie’s generosity with cash is a bonus, too. It has raised its payout for 47 consecutive years, which includes the time it was part of Abbott Laboratories (ABT) before its 2013 split. That makes AbbVie a longtime Dividend Aristocrat.
All the same, ABBV is the proverbial falling knife at the moment. Rather than try to catch it this second, it might make more sense to give it time to form a bottom.
Market value: $426.3 million
Distribution rate: 16.2%*
Oxford Lane Capital (OXLC, $10.02) might give you a headache no matter when you buy in.
Oxford Lane is a closed-end fund (CEF) that invests primarily in collateralized loan obligations (CLOs), which are pools of loans that have been packaged into tradable securities. CLOs earned themselves a bad reputation, as they and other exotic products helped blow up the world economy in 2008.
Clearly, you should tread carefully in this sector.
But investor revulsion toward CLOs helps to explain why the yields are so high today. At current prices, OXLC offers up a whopping 16.2% distribution rate – but note that a not-insignificant chunk of that will be eaten by expenses.
The appeal of collateralized loan obligations is that they reduce the risk of any single borrower by spreading the risk across a diversified pool. But during times of stress and rising delinquencies, CLOs can and do lose money. The underlying loans tend to be to riskier corporate borrowers that aren’t always the most financially stable. With the global economy looking a little wobbly, this probably isn’t the best time for a major new allocation.
Keep Oxford Lane on your watch list and consider it for purchase next time it sells off. During the energy rout of 2014 to 2016, OXLC saw its stock price drop by more than 60%. But in the ensuing recovery, the shares rose by more than 60%, and that doesn’t include the value of dividends paid.
* Distribution rate can be a combination of dividends, interest income, realized capital gains and return of capital, and is an annualized reflection of the most recent payout. Distribution rate is a standard measure for CEFs.
** This figure includes a 4.91% baseline expense that includes management, as well as a 5.75% interest expense that will vary over time.
Charles Sizemore was long IRM, LVS and MO as of this writing.