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All Contents © 2018The Kiplinger Washington Editors
By Charles Sizemore
| May 12, 2017
Dividend plays with seriously high yields aren’t particularly easy to come by these days, at least not without stretching and probably taking more risk than we should. But for those willing to look, there are still plenty of dividend stocks to buy out there with yields of 6% or higher that also happen to be growing their dividend payout.
Not surprisingly, these high-yielding dividend stocks tend to be clustered in the real estate (REITs) and energy sectors, where payouts are traditionally higher and where prices have really come down of late. But there are some real dividend gems to be found elsewhere too, in sectors as diverse as restaurants, video game retailers and even private equity firms.
Today, I’m going to recommend nine dividend stocks to buy, eight of which I own personally. Importantly, all have solid reputations as consistent dividend raisers. For me, this is the holy grail of investing: a high current yield and a dividend rising significantly faster than the rate of inflation.
Some of these stocks are a little on the speculative side, which is to be expected considering the S&P 500 yields a paltry 2% these days. Yet I consider all of these picks to be reasonably safe buys at current prices.
Prices and data are from the original InvestorPlace story published on May 10, 2017. 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%
I’ll start with a stock I would have never expected to include in a list of dividend stocks to buy — video game retailer GameStop Corp.
The bears have been mauling this stock for years, citing the rise of downloadable video games vs. traditional discs or cartridges. And more recently, investors have been leery of anything related to traditional retail, as Amazon.com, Inc. (AMZN) continues to turn the industry upside down.
Yet if there is a crisis in retail, it certainly isn’t showing up in GameStop’s results.
Revenues have been flat since 2011, but the company has done a good job of managing costs, and margins have remained stable. Meanwhile, earnings per share have been boosted by a dramatic reduction of share count. Since 2009, GameStop has repurchased nearly 40% of its shares outstanding, and it has done so while keeping its debt load very reasonable.
Of course, dividends are our theme today, and on that count, GameStop doesn’t disappoint. At current prices, the stock yields a sweet 6.1%, and it has been raising its dividend aggressively. Over the past three years, GME has hiked its dividend by a cumulative 38%.
That’s not too shabby.
Dividend yield: 6.4%
I mentioned that Wall Street is negative on retail-focused real estate investment trusts at the moment, and you can definitely see that in W.P. Carey Inc. REIT’s recent stock performance. Shares have gone essentially nowhere since 2013 even while the dividend has enjoyed solid, steady growth.
As a result, W.P. Carey now yields a fat 6.4%.
WPC runs an $8.5 billion portfolio consisting 903 properties spread across 217 tenants. Retail is its largest industry concentration at 17%, but Carey’s portfolio is well diversified across industries and across property types, and its largest U.S. tenant is Amerco (UHAL) subsidiary U-Haul International — a do-it-yourself mover and self storage company, and hardly a company I would consider at risk from Amazon.com.
W.P. Carey differs from its REIT peers in the sense that it has a large international presence. In fact, three of its four largest tenants are in Europe, and about a third of its properties are outside of the United States. That was a drag on performance when the dollar was exceptionally strong, but I consider it a decent currency hedge moving forward.
Dividend yield: 7.2%
Triple-net retail REIT Vereit Inc. has seen its shares beaten up of late. They’re down about 30% from their 52-week highs, but as a result, they now yield well more than 7%.
Vereit, formerly American Realty Capital, went through an extreme rough patch a few years ago due to an accounting scandal that overstated earnings. In the storm that followed, the REIT fired essentially its entire management team and had to temporarily suspend its dividend. Because of this reputational damage, a lot of investors have been scared away from the stock.
But their timidity creates opportunities for the rest of us.
Vereit’s new management team has done a fine job of cleaning up the mess left by its predecessors and selling off some of the lower-quality properties. But all the same, Red Lobster still accounts for about 7.4% of Vereit’s rental income. Red Lobster has struggled to attract diners in recent years, and I would like to see VER further reduce its dependence on the struggling restaurant chain.
I should note that the vast majority of Vereit’s tenants are extremely healthy and about as close to “Amazon-proof” as a retailer can be. Walgreens Boots Alliance Inc. (WBA), CVS Health Corp. (CVS) and Dollar General Corp. (DG) are among its largest tenants.
Dividend yield: 7.8%
I’ll include one more REIT in our list of 6% dividend stocks to buy — healthcare and senior living specialist Omega Healthcare Investors Inc.
With the Affordable Care Act’s future in flux and Medicare and Medicaid constantly looking to pinch service providers, investors have been reluctant to touch Omega and its peers.
But frankly, this shows a misunderstanding of how OHI works.
To start, Omega Healthcare is not in the business of providing elder care or operating the facilities. Their tenants handle that. As a triple-net landlord, Omega’s job is essentially just to collect the rent checks. So, an unexpected onslaught by Medicare or private insurance companies to reduce reimbursements would ding the profitability of Omega’s customers, but it wouldn’t directly affect Omega unless it literally drove its tenants out of business, which is something I’d consider extremely unlikely.
Omega has been an absolute dividend-raising powerhouse, boosting its payout for 18 consecutive quarters and counting. And at current prices, it yields a spectacular 7.8%, making it one of the highest-yielding equity REITs with a large market cap.
Distribution yield: 6.1%
I recommended blue-chip pipeline operator Enterprise Products Partners L.P. several weeks back, and I’d reiterate that recommendation today.
In an industry that tends to be dominated by gun-slinging cowboys that often borrow a little too aggressively and then find themselves in financial trouble, EPD has been anything if not stable. Rather that borrow heavily to maximize distribution growth (master limited partnerships have distributions, which are like dividends but have a few differences, including taxation rules), Enterprise Products Partners decided to be the tortoise rather than the hare.
All the same, it still manages to raise its distribution at a healthy 5%-6% per year, and at current prices yields a very attractive 6.1%.
If you believe in the long-term future on American onshore oil and gas production, then it makes all the sense in the world to own a conservative midstream operator like Enterprise Products. It owns nearly 50,000 miles of oil and gas pipelines, 260 million barrels of crude oil and natural gas liquids storage capacity and 14 billion cubic feet of natural gas storage capacity.
You can think of EPD as a one-stop shop for exposure to domestic oil and gas transportation.
Along the same lines, I’m wildly bullish on rival midstream MLP Energy Transfer Equity LP.
Energy Transfer isn’t nearly as conservative as Enterprise Products. In fact, founder Kelcy Warren is one of those “gun slinging cowboys” I mentioned earlier. Under Warren, ETE was a growth machine that was boosting its payout to shareholders by a whopping 30% per year. But the company and its related entities borrowed a little too aggressively during the boom times and then got themselves into a real mess when energy prices collapsed.
And Warren & Co. lost a lot of credibility when they intentionally torpedoed their merger with rival Williams Companies Inc. (WMB).
All of that is ancient history at this point, but investors are still wary of ETE. I understand their timidity, but I also consider it misplaced. Energy Transfer and its empire of underlying MLPs is still a growth machine. But they are opting to borrow less, reduce their debts, put distribution hikes on hold and fund more of that growth with internally-generated cash flows. All of this makes the company more stable and ultimately a safer bet for investors.
In the meantime, you can collect a nice 6.1% yield while waiting for their growth projects to bear fruit.
Dividend yield: 7%*
Main Street Capital Corporation is a solid business development company (BDC) that makes debt and equity investments in smaller and middle-market companies.
The 2008 meltdown was arguably the best thing that ever happened to BDCs like Main Street, as their biggest competitors — large banks — were essentially knocked out of the race. Banks have been scaling back their lending for nearly a decade now, which has allowed BDCs to fill the void they left behind.
You’ll note the asterisk in the box. I want to point out here that Main Street currently pays a regular dividend of just under 6%, so if you look for this company’s yield on a stock screener, that’s the number you’ll see. But after adding in its twice-per-year special dividends, MAIN’s total yield is pushing 7%.
Despite having such a high yield, Main Street is remarkably conservative. As a BDC, it is required to distribute essentially all of its profit as dividends to avoid paying taxes. The problem with this is that, because BDCs retain very little cash, they’re constantly at risk of having to cut their dividends if they have a rough quarter or two.
MAIN mitigates that risk by keeping its regular monthly dividend low by BDC standards and “topping it off” with a variable special dividend twice per year. It’s unorthodox, but it works.
Distribution yield: 7%
People complain about the high fees charged by hedge funds and private equity funds, but I take a different approach. Rather than gripe about paying the high fees… why not collect them yourself?
That’s essentially what we’re doing when we buy shares of leading alternative asset manager Blackstone Group LP.
Most of the large alternative asset managers now trade as public companies, but their organization has limited partnerships and their complex financial reporting tend to scare a lot of investors away. Furthermore, the distributions are often variable based on the performance of the private funds managed by the manager, which can vary wildly from year to year.
All of this can make companies like Blackstone confusing and difficult to own, but it also creates opportunities.
Today, Blackstone is really starting to reap the rewards from successful funds that were launched years ago and are now paying handsome incentive fees. And as a result, BX has been aggressively raising its distribution.
Based on the past four quarters, Blackstone is paying a trailing distribution yield of 7%, and I expect that yield to go even higher due to additional distribution bumps.
Dividend yield: 7.4%
Restaurateur DineEquity Inc, which owns and operates the Applebee’s and IHOP restaurant concepts, has traveled a rough road of late. It missed revenue estimates last quarter, and its brands — particularly Applebee’s — are looking a little long in the tooth. Same-restaurant sales were down 7.9% at Applebee’s last quarter and lost nearly as much the quarter before.
Still, there is a fair bit to like in this stock. It is primarily a franchiser, which allows it to run an efficient, capital-lite business with high margins. And the dividend, at 7.4%, is wildly attractive.
The company is highly leveraged, which is worrisome for a company with declining revenues. But long-term debt has been stable for years, and profits are high enough to easily cover both current interest payments and the dividend.
I’m not ready to pull the trigger on DineEquity just yet. In fact, in the only stock on this list I don’t currently own. The stock has been a proverbial falling knife since December and has been cut in half. But this is one to put on your watch list in case it finds some stability.
This article is from Charles Lewis Sizemore of InvestorPlace. As of this writing he was long BX, EPD, ETE, GME, MAIN, OHI, VER and WPC.
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