This is a guest contribution by Tom Hutchinson, Chief Analyst, Cabot Income Advisor
The last few months have been rough for stocks. And it‘s tough to predict what will happen to the market in the next several months. Fortunately, there is an area that will surely be in demand regardless of how things shake out – income.
People need income whether the economy is booming or in recession, or if inflation soars or contracts, and regardless of who is president. Cash flow never goes out of style. And income stocks, or dividend-paying securities, are the only game in town for investors to get a decent income in this still-low interest rate environment.
At the same time, there has never been a greater need for investment income. Pensions are increasingly rare. And people are living longer. In fact, it’s common for someone to live another 20 or 30 years after retirement.
Large segments of the population will have to generate income from savings, and dividends are the only game in town. Demand should be very strong for some of the best income stocks. And those stocks should perform well under almost any scenario.
There are currently only 14 stocks in the S&P 500 that pay more than a 5% yield. And not all those stocks are good investments. A high yield is a beautiful thing. But it won’t do you much good if the underlying stock price doesn’t hold up. It is a rare security indeed that can pay a high yield and appreciate in this tough market.
I’ve identified three stocks that offer just that. These are securities that pay yields that are safe and growing and should navigate today’s turbulent waters very well.
3 High-Yield Stocks to Consider
1. Enterprise Product Partners (EPD)
- Yield: 7.2%
Enterprise is one of the largest midstream energy Master Limited Partnerships (MLPs) in the country, with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities in the Gulf of Mexico as well.
The thing that jumps out about this security is the distribution. It currently yields 7.2%. And the payout is rock solid. Distributable cash flow covered the distribution by 1.6 and 1.7 times in the two worst quarters of the pandemic. A ratio of 1.2 is considered conservative.
The stock had been a laggard. It did return 23% in 2021 but that underperformed the S&P 500 in a year when energy was the top-performing sector. It tends to take a rally in the energy sector to get it moving higher, which has certainly been the case this year. EPD has returned 19% already in 2022 and hit a new 52-week high last week.
Despite the very strong recent performance, EPD is still well below the pre-pandemic high and miles below the all-time high, despite having higher earnings. It still sells at just 11 times forward earnings, which is well below the overall market. And things look very promising going forward.
In an uncertain market, EPD provides a huge and safe income and sells at a bargain valuation in a hot sector that is likely to continue performing well for the rest of the year at least.
2. ONEOK, Inc. (OKE)
- Yield: 5.6%
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock.
- Investment grade rated debt
- 85% of earnings fee-based
- 26 years of stable and growing dividends
- C corporation structure (generates a 1099 and not a K-1)
Earnings are resilient because ONEOK operates in the best segments and is well-positioned in the high growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest growing fossil fuel source. Midstream energy is a solid income-generating industry right now. But ONEOK is solid all the time.
There are some great things about the dividend. For one, it is a regular dividend and doesn’t generate a K-1 at tax time. It also qualifies for the maximum 15% tax. It may not be as high as EPD’s yield but it is one of only 14 S&P 500 companies that currently pays a better than 5% yield. OKE has also grown the dividend payout by an average of 13% per year for the past 21 years.
3. Global Ship Lease, Inc. (GSL)
- Yield: 4.3%
Global Ship Lease owns and charters container ships under fixed-rate charters to container shipping companies. The company deals in mid-size and smaller container ships, which are the workhorses of the of the main global containerized trade routes.
Shipping rates exploded during and after the pandemic as congested ports increased demand and the global supply chain couldn’t keep up with exploding demand. But most rates have since pulled back dramatically, except container shipping rates. Those rates have tripled since the end of 2020 and have risen sixfold since before the pandemic. While rates peaked last October, container shipping rates remain at very elevated levels.
Container rates have stayed high because demand for containers is greater and supply is more limited than for other types of shipping. And the supply/demand dynamic is likely to stay favorable for some time.
GSL has had a wild ride, along with the rest of the industry, over the last 10 years. But it has been showing strength and resilience in recent years. Global has consistently grown earnings and revenues over the last three years. The shipper also grew revenues and earnings through the pandemic. Earnings per share grew from $1.48 in 2019, to $2.09 in 2020, to $4.65 in 2021. And stellar growth should continue.
The biggest reason internally is that Global has been growing its fleet. In fact, Global grew its fleet by more than 50% in 2021 alone. Those ships and charters will be accretive to earnings this year.
GSL currently yields a strong 4.3% at the current price. The company just recently initiated a dividend, in January 2021. So, it doesn’t have a track record. But there are some very encouraging things. For one, Global just raised the next dividend by 50%, to $0.375 per quarter from $0.25. It is also triple the initial dividend. And that dividend is well supported with just a 16% payout ratio, with a lot of room to grow.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: