PAGP - Accelerate Your Passive Income Snowball: 2 Rapid Growth High Yield Stocks

2023-06-30 02:15:57 ET

Summary

• High-yield, high-dividend growth stocks can rapidly accelerate your passive income snowball.
• While these stocks are typically rare, we have found quite a few of them of late.
• We share two of our top high yield, high dividend growth, and relatively low-risk picks.

Many investors think that they have to choose between high yield or high growth, or even settle for something in between. However, this is not always the case. Once in a while, the stock market offers investors the opportunity to buy a high yield stock that is also growing its dividend rapidly. Even better (and rarer), there are times when you can buy a high yield, high dividend growth stock that also comes with relatively low risk.

The beauty of these stocks is that they make for perfect instruments to build your passive income snowball for three reasons:

1. Their high yield gives you an immediate head start on building up your passive income stream. Moreover, the higher the current yield, the greater the amount that you can reinvest to further boost your passive income snowball. This makes them great holdings for people not yet retired and still earning active income that covers their living expenses.
2. Their high dividend growth rates mean that your passive income snowball will grow rapidly even without having to reinvest any of your current passive income. This makes them great inflation-resistant picks for retirees who need to spend the current passive income on living expenses.
3. Their relatively low risk level makes them ideal holdings for the long-term since you can count on their passive income to continue rolling in during good times and bad.

While many passive income investors herald the Schwab U.S. Dividend Equity ETF ( SCHD ) as the solution to their dividend growth needs, the reality is that - while its diversification means that its risk level is low and its double-digit dividend CAGR track record is impressive - its current yield of 3.6% is just a bit low for many retirees. This is because many plan their retirements around the 4% Rule and a 3.6% yield comes up a bit short of that level. Moreover, many retirees like to generate dividend income well in excess of 4% because this gives them some extra cash flow for unforeseen emergencies, a greater buffer against inflation, and/or additional cash to reinvest in attractive opportunities that may come their way.

As a result, investors may want to at the very least supplement SCHD with some higher yielding picks that still do not raise their risk level too high nor sacrifice the dividend growth aspect of the equation either. In this article, we are going to discuss two of these high yield, high dividend growth, relatively low risk opportunities.

#1. Brookfield Asset Management Stock ( BAM )

BAM - recently spun off from Brookfield Corporation ( BN ) - is the latest in a series of higher yielding, higher growth securities from the Brookfield Empire, preceded by the highly successful Brookfield Renewable ( BEP ) ( BEPC ) and Brookfield Infrastructure ( BIP ) ( BIPC ) subsidiaries.

The pitch for BAM is simple. You get a:

• 4.1% forward dividend yield.
• A debt-free balance sheet with billions of dollars in cash.
• A well-diversified, high quality, competitively advantaged asset management business with long-duration and highly sticky cash flows.
• A very strong growth profile, with management guiding for a 15-20% dividend per share CAGR over the next several years.
• Analysts are a bit less bullish over the next few years, but still forecast a 12.2% dividend per share CAGR through 2025, which would put the forward yield on current cost at the end of 2024 at 5% with continued robust growth and pretty low risk likely on the horizon in the years following.

Given management's successful track record of delivering on past targets at BAM and in its subsidiaries BIP and BEP - which have crushed the S&P 500 ( SPY ) - there is good reason to be bullish on BAM as well.

If BAM can deliver on its robust growth initiatives across the insurance, direct lending/private credit, infrastructure, renewables, private equity, and real estate businesses - many of which enjoy strong tailwinds - BAM could be a huge winner for high yield passive income investors.

BAM's peer and main competitor Blackstone ( BX ) is another high yield, high growth stock. However, its dividend payout is varying from quarter to quarter whereas BAM's is primed to be consistent and up to the right. Moreover, BAM's projected dividend growth rate is higher than BX's. For those reasons, we favor BAM over BX at the moment.

#2. Plains All-American Stock ( PAA )( PAGP )

As a primarily oil-focused midstream business with a checkered past, Plains does not immediately produce the image as a rapid dividend grower. In fact, depending on it to grow its payout at all is tough to swallow given its history of brutal distribution/dividend cuts. In contrast, industry blue chips like Enterprise Products Partners ( EPD ) and Enbridge ( ENB ) have proven themselves to be dependable passive income growth machines.

However, there is good reason to be bullish on Plains moving forward:

• Management has sold off non-core assets and deleveraged the balance sheet aggressively, putting them on the cusp of a credit rating upgrade to BBB and limiting their exposure to headwinds from rising interest rates.
• Investors get an 8.1% NTM yield that is extremely well covered (2.3x) by distributable cash flow.
• Plains' distribution growth plan is extremely attractive when combined with the high current yield. Management has promised to grow the distribution by $0.15 per unit per year until the DCF coverage ratio falls to the 1.6x level. That implies a 14% growth rate for the distribution in 2024 and only slightly less than that in the years following. Given that the current coverage ratio is well above 1.6x, there is quite a growth runway ahead for Plains' distribution.
• Wells Fargo research validates management's guidance, forecasting a 12.4% distribution per share CAGR over the next three years.

For those looking to maximize current yield plus growth, Plains is arguably the most compelling opportunity in the market today. Given SCHD's very low exposure to energy, Plains is also an excellent diversification instrument for those using that ETF as a core portfolio holding. For those who want even lower risk than Plains and don't mind slower growth, EPD, ENB and even Energy Transfer ( ET ) make a lot of sense to us.

Investor Takeaway

High yield, high dividend growth investing while managing risk is obviously an extremely appealing way to invest. As a result, it is very difficult to find companies that fit this profile. However, thanks to the current rising interest rate environment and growing recession and geopolitical fears, these opportunities are beginning to pop up in surprising numbers.

At High Yield Investor we are buying shares of BAM, Plains, and numerous other high yield, high growth , low to moderate risk stocks aggressively to build a well-diversified portfolio that we expect to continue delivering long-term outperformance. SCHD is a great start for many retirees and other dividend growth investors. However, for those looking to boost their current yield a bit without forfeiting payout growth, BAM, Plains, and some other stocks can be a great addition to your portfolio.

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