1100 13th Street, NW, Suite 750Washington, DC 20005202.887.6400Customer Service: 800.544.0155
All Contents © 2020The Kiplinger Washington Editors
By Lawrence Meyers
| June 21, 2017
The hunt for high-yield stocks continues, even after the Federal Reserve boosted interest rates again this month. While the prime rate keeps edging higher, bonds are taking their sweet time catching up in yield.
Besides, you want to stay away from bonds, anyway. Rising interest rates will certainly help their yields, but that’s not going to offset the declines in price that they’re going to end up experiencing here sooner than later.
My thought? Look far, far beyond the bond market, especially if you’re looking for truly high yield.
Whether it’s individual equities, ETFs or even a couple other alternatives, the market is stuffed with high-yield stocks — some out in the open, others that take a bit of digging, all of which deliver between 5% and nearly 12% in yield.
Here’s a look at all 10 dividend payers, suiting a number of different risk profiles, and some of which are being considered for my new stock advisory newsletter, The Liberty Portfolio. In no particular order …
Prices and data are from the original InvestorPlace story published on June 16, 2017. Click on ticker-symbol links in each slide for current prices and more.
Dividend Yield: 7.4%
City Office REIT Inc. (CIO) is actually smaller than most real estate investment trusts that I would get involved in, because I prefer long track records and larger portfolios that demonstrate management has the ability to execute.
However, I consider little ones like CIO from time to time because small-cap plays have further to run, and can result in sizable growth alongside high yield.
City Office REIT is an investor in office properties that inhabit urban markets, and only those that reside in the high end of the property world. CIO focuses on urban areas where jobs are actually being added at a rapid clip, such as Dallas and Portland, Oregon.
And with 50% of its properties rented by government entities, there’s a certain degree of consistency we can expect.
Ashford Hospitality Trust, Inc. (AHT) is a longtime personal holding of mine in the world of high-yield stocks.
This lodging-focused REIT owns hotels all over the country, and recently started honing in on upper-upscale properties, moving away from the mid-level properties it used to own and manage. EBITDA growth is robust, its properties often outperform its peers, and the management team has been in hotels for a combined period of more than 100 years.
With 19% insider ownership, and the next closest peer’s management only owning 7.6% of their shares, AHT management is the most highly aligned play in the lodging REIT sector. The dividend is plump, too, at more than 7%.
There’s another way to play AHT and many other REITs — preferred stock.
What I love about preferred shares is that their dividends are even safer than common stock. If the company’s liquidity gets squeezed, it first must cut the common dividend before the preferred. During the worst of the financial crisis, when all other hotel REITs suspended both common and preferred dividends, only Ashford kept their preferred in place.
If that isn’t safety, I don’t know what is.
Meanwhile, preferred stock tends to be extremely stable compared to the underlying companies, and they pay well — usually in the 6%-7.5% range.
There are a few choices here, but the Ashford Hospitality Trust Preferred 7.375% Cumulative Series G is actually one of the few preferred trading below par. Just note that the syntax for the actual ticker for these and other preferreds varies depending on your stock research tool or brokerage account.
While we are on the subject of hotel REIT preferreds, look at Summit Hotel Properties Inc’s (INN) 7.125% Cumulative Preferred Series C.
Summit plays in an area that Ashford used to be in — the premium-branded select-service hotels in the upscale segment. Summit has 76 hotels in 22 states. Its management has less experience than Ashford as far as on-property tenure is concerned, but it’s still solid. And Summit Hotel is a good company overall, generating EBITDA margins that are among the highest in the select-service segment (37.6% according to its June presentation).
It’s a bit more transaction-driven that I’d like, but the preferred yield just under 6.9% seems pretty solid.
Business development companies can be a great choice when it comes to high-yield stocks. But you have to choose carefully. The BDC structure is such that these companies will borrow money at low rates, and lend it out at higher rates. But they have to make sure they lend prudently.
That’s why I prefer to go with a basket of stocks for BDCs — to reduce the risk associated with buying just one. The ETRACS Linked to the Wells Fargo Business Development Company Index ETN (BDCS) — a mouthful of a fund if there ever was one –owns a collection of 40 BDCs, so in the event that one or two underwrite really poorly, you won’t get snagged by their bad decisions.
Top holdings at the moment include Ares Capital Corporation (ARCC) and FS Investment Corporation (FSIC).
Closed-end funds are a bit like mutual funds, in that they raise money and purchase securities. In the case of CEFs, though, the money is raised via an initial public offering.
The prospectus discusses exactly what the money is used for and there is a fixed number of shares. What CEFs permit is for a manager to create highly targeted funds, so that they can focus on something they are experts in.
In theory, investors reap the benefits.
Alpine Total Dynamic Dividend Fun (AOD), a CEF, is a bit different than most high-yield stocks and funds in that AOD isn’t just going after dividend stocks, but searches for them globally, and tries to buy those that the fund thinks will increase dividends over time. At the moment, Apple Inc. (AAPL) and Banco Bilbao Vizcaya Argentaria SA (BBVA) are among the fund’s top holdings, but at just 2% and 1.4%, indicating that there’s very little single-stock risk.
The yield for AOD is just below 8%, and it trades at a nearly 10% discount to NAV.
Starwood Property Trust, Inc. (STWD) belongs to that category of REITs known as mortgage REITs (mREITs).
Now, I admit that after the mortgage crisis, I was fearful of going anywhere near these kinds of investments. Yet as investors, we have to stay realistic and do research, not get carried away by our emotions.
In this case, Starwood turned out to be a different beast than most mortgage REITs, in that STWD looks at shorter mortgage terms, usually up to five years at most. It also diversifies its investments, using both mezzanine loans and floating first mortgages. Starwood is so careful with its underwriting that, so far, it has no realized loan losses. It also makes smaller loans and then sells them off.
The entire strategy results in a mid-8% yield, which actually makes it fairly middling in the mREIT world. But the relative safety compared to other mREITs makes it one of the best high-yield stocks out there.
Carl Icahn is always in the news, and it may surprise you to know that you can invest right alongside him, in Icahn Enterprises LP (IEP). You can think of IEP in different ways — as a CEF, as a mutual fund, or even as a mini-Berkshire Hathaway Inc. (BRK.B). That’s because Icahn invests in distressed companies that he tries to take control of, so he can improve their operations, and sell them off.
Right now, Icahn’s holdings are scattered across energy, refining, railcars, real estate, metals, copper and automotive.
IEP is itself a value or distressed play at the moment, but that is not always the case. It’s about 10% off its 52-week low.
However, because it pays a whopping $6 per share annually, that means the yield has ballooned to nearly 12%. This is a huge opportunity if you believe in Icahn’s ability to turn this around.
AT&T Inc. (T) is not what most people would consider a growth stock.
However, kudos to the venerable company for not sitting on its aging telecom business. It went after DirecTV, and is waiting to close on its purchase of Time Warner Inc. (TWX). This will expand it to become a content producer and distributor, and in the world where content is king, and distribution is a generator of cash flow, that translates well to a solid and reliable dividend.
At the moment, pre-TWX, the company generates about $15 billion in free cash flow, which results in a 5% yield. Even now, that only accounts for about two-thirds of total free cash flow. Add Time Warner’s FCF of $4.2 billion — from which only 30% is paid out as its dividend — and you have room for dividend growth in the combined entity.
We have one oddball here in the universe of high-yield stocks. Qwest Corp. 7.5% Senior Notes (CTW) is the remnant of Qwest Communications, which provided local telecom service in 14 states until 2011. That’s when it merged with CenturyLink, Inc. (CTL).
The CTW notes were part of the $11.8 billion in outstanding debt that was acquired in the merger, and which continues to pay out as per the obligation.
What’s interesting here is that CTL itself pays a dividend of just more than 8%.
You could certainly buy CenturyLink stock, and the dividend seems like it is sustainable since CTL pays $1.17 billion in dividends off its $1.6 billion in cash flow. Still, the safer bet is to buy CTW, and collected the preferred dividend in the event the common of CenturyLink gets cut.
This article is from Lawrence Meyers of InvestorPlace. As of this writing, he owns AHT, AHT-PG, CIO and STWD.
More From InvestorPlace
8 No-Brainer Retirement Stocks to Buy
7 Stocks With More Upside Than Alphabet
7 Dividend Stocks That Make The Grade