MPW - Five 6-11% Yields That Will Likely Keep Growing Their Dividends
2023-05-02 08:00:00 ET
Summary
- We buy mainly dividend growth stocks and try to steer clear of dividend cutters, no matter how juicy their yields may appear.
- Fortunately right now investors can enjoy both high yield and strong dividend growth in the same stocks.
- I highlight 5 high yield stocks that will likely continue hiking their dividends moving forward.
Earlier this year we highlighted 2 high yield stocks that were likely to cut their dividend in the near future:
Both of these businesses were dealing with mounting pressure on their balance sheets that we thought could prompt them to cut their dividends in order to conserve more cash for reducing leverage. Furthermore, AQN was facing a tidal wave of capital demands with the impending (but now cancelled) acquisition of Kentucky Power along with an ambitious capital expenditure program to drive further growth. Meanwhile, MPW has been battling a growing number of tenant issues as hospital operators have been struggling under the weight of inflationary pressures and lingering fallout from COVID-19 headwinds.
With these additional pressures on free cash flow, we thought it was highly likely that both of these stocks would have to cut their dividends. AQN has already done so, slashing their dividend by 40%
Meanwhile, MPW is still hanging on to their dividend, but we still believe it is on thin ice. Management - while trying to damp down any concerns about a dividend cut - still admitted on the earnings call that in order to address elevated leverage:
none of those considerations [to include a dividend cut] are off the table.
Today, we are going to shift our focus to 5 high yield stocks that are likely to continue growing their dividend moving forward.
Altria Stock ( MO ) - 7.91% Yield
MO is a great dividend stock given its sky-high 7.91% dividend yield that is considered to be quite sustainable thanks to its competitively advantaged and recession-resistant smokable products business model, solid balance sheet, and 75% expected 2023 payout ratio. Moreover, with a 53 year growth streak, it is a Dividend King, giving management immense incentive to continue growing the dividend moving forward.
Despite its obvious merits and status as a high yield dividend growth stock, we are steering clear of the stock at High Yield Investor given that management has a poor capital allocation track record. It has spent billions of dollars on stock buybacks at prices that have failed to generate attractive returns while also wasting billions of dollars more on failed acquisitions of companies like Juul Labs as part of its attempt to grow and diversify the business. Moreover, its core, competitively positioned core business is shrinking as smoking becomes less and less popular with younger generations.
While MO has been able to sustain earnings per share growth through improving operating efficiencies, buying back stock, and raising prices, it can only cut so many costs and can only raise prices so high. As the older generation continues to decline, so will demand for MO's products. Therefore, until management can prove that it can grow and diversify meaningfully outside of its core business, MO's long-term dividend outlook remains highly uncertain.
Enbridge Stock ( ENB ) - 6.64% Yield
ENB is a great sleep well at night energy infrastructure business with a BBB+ credit rating and a large portion of its debt not maturing for decades to come while set at fixed and attractive interest rates.
Moreover, its business model is well diversified and includes a large number of regulated assets as well as a growing renewables portfolio. With the vast majority of its cash flows tied to commodity price resistant fixed-fee contracts and backed by investment grade counterparties, ENB is highly likely to continue generating very stable cash flows for years to come regardless of the macro environment.
Moreover, with 27 years of dividend growth, ENB shares company with the Dividend Aristocrats ( NOBL ). With a 6.64% forward dividend yield, a 3-5% expected annualized dividend growth rate, and a very low risk business model, ENB makes for a great core dividend growth stock that can also provide a very attractive source of current income for investors.
Energy Transfer Stock ( ET ) - 9.60% Yield
ET boasts a near double-digit distribution yield while also enjoying ~2x distributable cash flow coverage. With strong free cash flow generation, an investment grade credit rating, very manageable debt maturities, and a relatively stable, well-diversified midstream business model, ET's distribution not only appears safe but is likely to continue growing for the foreseeable future.
In fact, it has recently been one of the most dynamic income growth stocks in the entire market. Since late 2020, ET has generated total returns and distribution growth that have crushed both the broader market ( SPY ) and the midstream sector ( AMLP ):
Meanwhile, management recently hiked the distribution once again and guided for more growth to come , stating:
Although Energy Transfer cannot guarantee future performance, the Partnership expects to make ongoing quarterly increases to its common unit distribution of $0.0025 ($0.01 on an annualized basis) and is now targeting a 3% to 5% annual distribution growth rate.
Between its near 10% current yield, the 3-5% expected annualized distribution growth rate, and likely valuation multiple expansion (it currently trades at a steep discount to sector peers), ET is perhaps the most promising pick in this list from both a yield and total return perspective.
Ares Capital Corp Stock ( ARCC ) - 10.39% Yield
ARCC is one of the best business development companies ( BIZD ) available in the public markets. It has a tremendous track record of sustaining and growing its base quarterly dividend and has recently grown it quite aggressively. Moreover, it has delivered market-crushing performance over the long-term:
We recently spoke with the company , and they doubled down on their commitment to their dividend, emphasizing that they have stress-tested the sustainability of their base quarterly dividend under a variety of different scenarios and feel good about it.
Moreover, with their regular habit of opportunistically issuing equity accretively whenever their shares trade at a premium to NAV, solid investment grade balance sheet, and large amount of spillover income, we expect them to not only sustain, but continue to grow their dividend over time,
Last, but not least, their strong underwriting and large, skilled, and active portfolio management team position them to weather an economic downturn better than many of their peers. With a 10.39% current dividend yield, the stock trading at a slight discount to NAV as of this writing, and their impressive long-term track record of generating book value per share growth over time on top of their generous dividend, we expect double-digit total returns are likely for them as well.
W.P. Carey Stock ( WPC ) - 5.75% Yield
Last, but not least, WPC is a rock-solid triple net lease REIT ( VNQ ) that has delivered exceptional long-term results for investors:
Moreover, its strong balance sheet (BBB+ credit rating from S&P), very defensive business model (triple net leases with a focus on industrial real estate), proven management team, and very reasonable expected ~80% payout ratio for 2023 make the dividend very safe.
The company also has a robust growth pipeline ahead of it and is currently benefiting from elevated inflation numbers given that the majority of its rent is linked to CPI-based rent escalators.
Between the 5.75% dividend yield, likely valuation multiple expansion, and expected mid-single digit annualized per share growth in the coming years, WPC is positioned to deliver low risk, double-digit annualized total returns, making it a great sleep well at night real estate investment that combines attractive and dependable current income with steady long-term dividend and principal growth.
Investor Takeaway
While dividend cuts are almost always double-whammies for investors as their income gets slashed while their principal also typically falls with it, high yield dividend growth stocks are almost always double-winners for the same reasons. In addition to generating very attractive current income and with it a more dependable source of returns, the long-term growth means that the income stream keeps up with inflation better and the share price tends to appreciate as well.
The result of this powerful combination means that high yield dividend growth stocks generally beat the market, and this has certainly been the case for us at High Yield Investor, as we have crushed the market since the inception of our portfolio:
Core Portfolio (High Yield Investor)
With high yield dividend growth stocks like ET, WPC, and ARCC - and dozens more like them - in our portfolio today, we expect to continue generating an attractive combination of high current income and total return outperformance over the long-term.
For further details see:
Five 6-11% Yields That Will Likely Keep Growing Their Dividends