T - 6-10% Yields: 3 High Yielding Stocks To Buy And 2 To Avoid

2023-07-26 20:00:00 ET

Summary

• High yield investing - when done right - can be extremely rewarding.
• We share three high-yielding high-quality stocks that we think have a place in a high-yielding portfolio.
• We also share two high-yielding stocks that investors may want to avoid right now.

Buying high yielding stocks of quality businesses with lengthy track records of sustaining and growing their dividends is a great way to compound wealth over the long-term for two big reasons:

1. It enables investors to keep their emotions in check because - rather than fixating on their portfolio's constantly fluctuating value - they can focus on the consistent and growing income stream generated by dividends from the companies in their portfolio. This approach can help prevent panic-selling during market crashes and instead encourage investors to have the clear-eyed confidence and long-term perspective needed to buy stocks at deeply discounted prices in order to lock in more attractive dividend yields.
2. Companies that consistently pay out a high percentage of cash flows as dividends over long periods of time while simultaneously growing their earnings power clearly have exceptional management and/or business models. This is because the challenges posed by rapid technological change, government lockdowns of businesses, supply chain logjams, financial crises, high inflation, rapid swings in interest rates, and booms and busts will disrupt the dividend payouts of all but the strongest and best run businesses. As a result, whenever you can find a high yielding business that also has sustained or even grown its dividend for many years, it is very likely an exceptional business.

In this article, we will three high yielding stocks - with yields between 5 and 10% - that have impressive track records of sustaining and growing their dividends as well as two high yielding stocks that we believe investors would be better off avoiding at the moment.

High Yield Buy #1: Crown Castle Stock ( CCI )

CCI has a very impressive track record of delivering a combination of robust dividend growth...

and attractive total returns for shareholders:

Thanks to its well-diversified portfolio of ~120,000 small cells - an industry that is expect to grow at a 15-30% CAGR through 2025 - it is well-positioned to enjoy robust growth for years to come. In the meantime, its over 40,000 towers and 85,000 route miles of fiber provide it with very dependable cash flows to support its current dividend that yields nearly 6% on a forward-looking basis.

While the company is facing near-term headwinds due to some cancelled leases stemming from T-Mobile's ( TMUS ) acquisition of Sprint, the company expects to resume dividend growth within a few years and resume its long-term trajectory of dividend growth at a 7-8% CAGR.

For investors with patience, buying the attractive and safe 6% yield today will likely result in significant long-term outperformance along with a lucrative and growing passive income stream.

High Yield Buy #2: Enterprise Products Partners Stock ( EPD )

EPD is the blue chip gold standard of midstream businesses with an industry-best A- credit rating from S&P and a well-diversified portfolio of energy infrastructure assets that are diversified by commodity exposure and geographic location. Moreover, management has proven to be exceptional through the consistently high returns on invested capital and quarter century distribution growth track record that have combined to deliver significant total return outperformance for long-term unitholders:

Insiders are well-aligned with unitholders as well given that they own nearly one-third of the partnership.

With a 7.4% current yield that is covered ~1.8x by distributable cash flow and expected to grow at a ~5% CAGR for the foreseeable future, EPD is one of the best - if not the best - high yield investments available today.

High Yield Buy #3: Ares Capital Stock ( ARCC )

ARCC is a Business Development Company ( BIZD ) that is exempt from corporate income taxes because it is a pass-through entity that pays out at least 90% of its taxable income to shareholders as dividends. Given that it generates its income from a diversified portfolio of loans and equity investments to middle market companies and has a debt-to-equity ratio that is consistently over 1x, it is impressive that it has not only sustained, but actually grown, its dividend over the long-term.

In fact, since the Great Financial Crisis, it has not cut its dividend once and has grown its quarterly payout by 37% over that span alongside generous special dividends even as many of its peers have had to cut theirs. Over the past two years, ARCC's portfolio of mostly floating rate loans has been boosted by rapidly rising interest rates, resulting in 20% dividend growth.

With a current dividend yield of nearly 10% that was covered 1.24x by net investment income in its most recent quarter along with considerable spillback income, ARCC looks like a very sustainable double-digit dividend yield. When you combine that with its very impressive track record of delivering attractive total returns for shareholders, ARCC looks like a worthwhile holding for a high yield portfolio:

High Yield Avoid #1: AT&T Stock ( T )

T certainly looks cheap at the moment after a catastrophic stock price performance since just prior to the COVID-19 outbreak even as the broader stock market ( SPY ) has boomed:

Moreover, its 7.6% dividend yield also looks very attractive for income-focused investors.

However, while we do think that the dividend is sustainable for the foreseeable future, we see little growth potential for the business given that it is having to allocate all of its excess cash after paying dividends towards reducing its large debt burden and meeting hefty capital expenditure requirements in order to keep up with rapidly changing telecommunications technology and an increasingly competitive industry landscape.

These factors - combined with the fact that its EV/EBITDA multiple remains above its historical average despite the lack of growth potential and high interest rates - make it an unappealing investment as it is unlikely to deliver long-term annualized total returns in excess of its current dividend yield and potentially may even underperform that as its valuation multiple could potentially shrink further to be in-line with its historical average.

High Yield Avoid #2: American Tower Stock ( AMT )

We have no issue with AMT per se, and certainly find its long-term track record of dividend growth impressive:

However, it is essentially a very close peer of CCI's. Given that CCI's dividend yield is ~70% higher than AMT's, both have strong balance sheets and long-term growth prospects, and CCI's valuation is substantially cheaper than AMT's across the board...

We think that it makes little sense to buy AMT when you can get similar industry exposure, similar quality, and similar long-term growth potential from CCI for a much cheaper valuation and higher current yield. For those who want to hedge their bets further, potentially pursuing a pair trade by going long CCI and shorting AMT may make sense as well until the valuation gap closes some.

Investor Takeaway

High yield investing - when done right - is a great way to invest because it helps aid investor psychology during market crashes and also helps investors to focus on some of the highest quality businesses and management teams.

In CCI, EPD, and ARCC we believe investors have the opportunity to buy exceptionally well run businesses at attractive current yields alongside solid long-term total return prospects.

Meanwhile, investors should be wary of buying T given that it is still not trading at a compelling discount and that management has destroyed so much shareholder value over the years through making overleveraged and overpriced acquisitions, leading to a recent dividend cut and a very weak growth outlook for the company.

Finally, AMT - while a great company not unlike CCI - is clearly overpriced relative to its peer, making it a stock that high yield investors may want to avoid and instead focus more of their capital on buying CCI shares. At High Yield Investor, we are buying dozens of similarly high quality, high yielding opportunities, helping us to deliver total returns that have crushed SPY since the inception of our portfolio in late 2020.

For further details see: