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All Contents © 2019The Kiplinger Washington Editors
By Vince Martin
| December 15, 2017
Over the long run, high-yield dividend stocks have been the stocks to buy. Studies have shown that over time, they've outperformed both the broad market and lower-yielding dividend payers.
But from an individual stock-picking standpoint, a high yield isn't always a good thing. A dividend yield alone doesn't support a bull case. I detailed 10 yield traps back in June, and the 2017 performance of well-known, widely held issues like General Electric (GE) and Frontier Communications (FTR) shows what can go wrong when high-yield dividends are called into question.
So it's important to remember that chasing high yields means—to at least some extent—chasing risk. And it makes picking reasonably safe payouts even more important. An income investors whose stock cuts its distribution faces a double whammy. Income is reduced—halved in the case of GE—and the stock price usually comes down as well.
The 10 stocks here all look to avoid that outcome, at least in the near-term. All 10 offer yields over 4%—and payouts almost certain to stay intact through at least 2018. Again, that doesn't mean these stocks are without risk. But for investors looking to buy dividend stocks with high yields—and avoid the pain of a dividend cut—these stocks all are worth a long look.
Prices and data are from the original InvestorPlace story published on Dec. 7. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 6.1%
There are some attractive dividend offerings from overseas oil companies, but from here, BP looks like the safest bet. I detailed the bull case for BP stock recently—a bull case that should be attractive precisely to income investors looking for end market diversification.
BP's 6.1% yield does face some long-term risk, notably from a leg down in Brent oil prices. But BP is confident enough at the moment to start repurchasing shares in 2018 in addition to its dividend. The tapering off of its Deepwater Horizon liabilities will free up cash for shareholder returns beyond next year as well.
Investors can also consider Total (TOT) or Royal Dutch Shell (RDS.A), both of which yield over 5%. But from here, BP is the best choice for investors building a high-yield portfolio—as long as those investors are willing to keep a close eye on oil prices.
Dividend yield: 6.7%
A.H. Belo might seem an odd choice for this list. The company's flagship asset is the Dallas Morning News, which exposes AHC to the secular decline in the newspaper business. Trailing GAAP earnings are negative, which would seem to raise the risk of a dividend cut as well.
But AHC actually is a real estate play—and that play isn't over. The company has exited its headquarters in Dallas, and that property will be put on the market. Proceeds from the sales of two parking lots led to a special dividend declared last month. And the company continues to build out local and online marketing businesses that should cushion weakness in the core newspaper business.
As a result, AHC is highly unlikely to cut its dividend next year—unless it gets bought out by Gannett (GCI) or another larger player. In that eventuality, investors can simply reinvest the proceeds in one of the other stocks on this list.
Dividend yield: 7%
Gaming and Leisure Properties was spun off from Penn National Gaming (PENN) back in 2013. GLPI is a real estate investment trust that holds Penn's properties, and has added more since. Most notable among them are the casinos of Pinnacle Entertainment (PNK), which executed a similar sale-leaseback last year.
GLPI investors have received a solid dividend since the spin—though they've actually missed out on big gains in the space. Both PENN and PNK have more than doubled year-to-date, for instance. But GLPI now looks like a lower-risk play in a space where valuations of regional operators look increasingly stretched.
Meanwhile, the 7% payout looks safe. There is a stepdown in rent from Penn coming at the end of next year—but GLPI management insisted on the Q3 conference call that the dividend would stay flat at worst through that event. The industry looks healthy, and both Penn and Pinnacle look like credit-worthy tenants at the moment.
GLPI does have some long-term risk in the event of a major recession. Investors who see the gaming space—potentially boosted by sports gaming legalization—as having further upside should look to the operators themselves. But for income investors, a reasonably safe 7% yield is hard to find. Yet that's what GLPI seems to offer.
Dividend yield: 5.5%
I'm not the biggest fan of U.S. retail, but that's part of why Guess? looks intriguing at current levels. The company's U.S. operations actually have been unprofitable in terms of operating income so far this year. But the businesses in Europe and Asia now generate well over 50% of revenue—with constant-currency growth guided to high double-digits in both regions for the full year. Guess? is cutting costs and closing stores in the U.S., making it more and more an overseas-driven story.
So there's a growth case here—and a very safe dividend. The payout ratio looks extremely high, at 150% based on this year's adjusted EPS. But the ratio is lower on a free cash flow basis, and overseas performance means Guess? at least has the potential to grow into the dividend. Meanwhile, $2.40 per share in net cash on the balance sheet is enough to cover more than ten quarters' worth of dividends—and enough to keep investor confidence in the payout for some time.
The overseas opportunity and continuing margin expansion makes GES worth considering for investors of all stripes. But for income investors in particular, GES seems like a very intriguing play.
Dividend yield: 5.2%
Overall, there's a clear "value play or value trap?" argument when it comes to Quad/Graphics. The company is dealing with a potentially shrinking printing industry, one reason the stock trades at just 11x forward EPS—and offers a 5%-plus yield. Efforts to pivot to digital offerings are moving slowly, and there's a real fear that QUAD earnings are at or near a peak.
So there is risk here. But there's opportunity as well. Free cash flow is impressive, and Quad/Graphics continues to deleverage its balance sheet. The dividend isn't growing—it has been held at 30 cents quarterly since the beginning of 2013—but it has been supported. And management, at least according to one analyst, on the Q2 conference call seemed to hint at a potential, long-awaited increase.
At the least, that dividend will hold through 2018—and likely beyond. And it could provide a nice bonus for investors willing to bet on the company's cost cutting initiatives and digital opportunities.
Dividend yield: 4.9%
Semiconductor manufacturer NVE Corp has pulled back 15% in the past three weeks, amid a broader sell-off in the chip sector. And that pullback has made NVEC interesting even beyond the dividend.
NVE makes so-called spintronic products, including sensors and couplers that transmit data. Margins are enormous—gross margins are 79% over the past twelve months—though top-line growth has been rather modest.
But NVE has a fortress balance sheet, with over $16 in cash and investments and no debt. That cash alone keeps the $4 per share in annual payouts safe, with EPS near $3 contributing as well.
All told, NVE is an interesting small-cap play. An acceleration in growth could move the stock higher; so could a return to optimism toward the semiconductor sector as a whole. (Even high-flyer Nvidia Corporation (NVDA) has dropped 14% in the past few sessions.) Either way, the current yield looks extremely safe.
Dividend yield: 6.8%
Covanta is the riskiest stock on this list—for a number of reasons—but the dividend should be safe through 2018. On post-earnings calls, management has been asked about its sustainability repeatedly this year, and repeatedly reaffirmed its commitment to the payout. But there is some skepticism on that front from investors and Wall Street, particularly given the company's substantial debt burden.
Meanwhile, the company's operating business—creating energy from municipal waste, and other services—has been choppy. 2017 guidance implies a 2%-3% increase in Adjusted EBITDA year-over-year, but a decline in free cash flow. The payout ratio on that basis should be near 100%—and over 100% when accounting for dividends on preferred stock and other factors.
But there's some good news here, too. A long-awaited facility in Dublin, Ireland came online just this week. Those same analysts see a better 2018 coming, though a ~12% short interest suggests some traders disagree with that outlook.
Overall, there's enough here to at least be intrigued, and management seems unlikely to walk back its dividend commitment in 2018, at least. Again, this is not a stock for risk-averse income investors. But the combination of the contribution from Dublin, improvements elsewhere in the business, and a nearly 7% yield at the least makes CVA worth a long look.
Dividend yield: 6.2%
Shares of retailers—and their landlords—have jumped lately. But strip mall owner Kimco Realty has been left behind. The stock touched a 5-year low in June—and has bounced just 8% since.
In the short term, KIM's dividend isn't going anywhere. The company actually just raised its payout 3.7%, pushing its yield over 6%. Adjusted FFO (funds from operations) is up less than 1% YTD, but it is up, and Kimco has a number of redevelopment opportunities in front of it. A recent strategy to exit smaller and international markets should de-risk the business as well.
Strip malls are economically sensitive, so there is some macro risk here long-term. But there's also a contrarian argument for KIM in an environment where retailers and grocers—the latter of whom anchor ~70% of KIM properties—are under significant pressure. If Amazon.com (AMZN) isn't really going to take over the world, and if retail isn't really dying, Kimco would be a likely beneficiary. And investors can benefit from a 6%-plus yield while they're waiting to find out if that indeed is the case.
Dividend yield: 5.4%
Truthfully, I debated putting AT&T on this list—because I'm simply not a fan of AT&T stock. I don't believe the stock is the "safe" dividend stock too many income investors believe it to be, particularly given the drama surrounding its proposed acquisition of Time Warner (TWX). I even called T stock one of 10 value traps to avoid back in July.
But the AT&T dividend will stay intact—for 2018, at least. Whether Time Warner is acquired and starts adding cash flow, or isn't and leaves AT&T with dry powder it won't be able to use, AT&T simply can't afford a dividend cut right now.
And, to be fair, there is a bull case for AT&T. The roll-up of DirecTV, AT&T's legacy assets, and Time Warner content does offer some potential. 5G still sits on the horizon. I strenuously argue against seeing AT&T as a "safe" stock—this isn't Ma Bell anymore, or close—but there is a bull case in there somewhere.
Again, I'm skeptical. Between debt, the lack of growth, and the "circular firing squad" that is the U.S. wireless industry, I believe AT&T has too many challenges, even at a 5%-plus yield and 12x-plus forward earnings per share. But investors who disagree—or simply are looking for yields over 5%—might see AT&T stock very differently.
Dividend yield: 10.8%
The highest-yielding stock on this list, Sabra Health Care REIT unsurprisingly is one of the riskiest. The company's merger with Care Capital Properties was criticized by shareholders as being too expensive. The company's tenants—mostly skilled nursing facilities—are struggling with squeezed reimbursement from public and private insurers, raising fears that Sabra will have to cut rents in the future or lose tenants. And 9% of Sabra's portfolio is leased to Signature HealthCARE, LLC, which is headed for a restructuring.
But there's some good news. Sabra stock looks ridiculously cheap, at less than 8x 2018 adjusted FFO. The dividend yields a whopping 11%. And while long-term risks persist, that dividend was just raised, meaning it easily should remain intact through 2018.
Again, SBRA is a high-risk play—and there's a lot outside of Sabra's control that go can wrong. But investors should at the least get a double-digit yield on cost over the next 12 months—and with a couple of breaks, some solid price appreciation as well.
This article is from Vince Martin of InvestorPlace. As of this writing, Martin held a position in AHC.
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