FSK - Quality 7%-14% Yields I Am Buying Hand-Over-Fist

2023-08-09 09:00:00 ET

Summary

• High yield investing can be an extremely effective way to compound wealth over the long term.
• I share some of our favorite quality 7-14% yielding picks of the moment.
• I also share why high yield investing is such a great approach to long-term investing.

I love investing in high-yield stocks with sustainable payouts because:

1. The steady stream of lucrative passive income provides me with plenty of fresh capital to deploy into the best opportunities of the moment.
2. Businesses that tend to pay out high yields are typically easier to value since their cash flows are much more stable and their growth rates tend to be much lower and more predictable than other stocks. As such, it is rarer to have long-term big losers and much easier to know when such stocks are on sale and overvalued.
3. It helps me to remain grounded and clear-minded during market crashes since my portfolio's passive income stream tends to remain stable - or even continue to grow - even if the market value of the portfolio is plummeting.

While I am not a retiree, retirees who adopt this approach to investing reap additional benefits:

1. They are able to better budget by knowing what sort of cash flow they will be generating from their savings that they can count on to meet their living expenses.
2. They can sleep well at night and enjoy their retirement instead of worrying about whether or not their portfolio will generate enough capital appreciation to sustain their retirement lifestyle. While their peers may be panicking during a market crash, retirees who own quality, high-yielding stocks can remain calm and enjoy life.

Here are three of these quality and sustainable 7-14% yields that I am buying hand-over-fist:

#1. W. P. Carey Stock ( WPC )

WPC is a triple net lease REIT ( VNQ ) that is heavily weighted towards industrial assets with the majority of its base rent coming from leases with contractual rent escalators that are indexed to CPI, making it a rare investment that is both recession resistant and relatively well protected against inflation.

In addition to its attractive exposure to industrial real estate and inflation-hedged leases, WPC also has very strong occupancy numbers, with a current occupancy rate of 99%. The company has raised its dividend every year for a quarter-century and has delivered long-term total return outperformance relative to the S&P 500 ( SPY ):

Its NTM dividend yield is close to 7% and is well covered by AFFO. Moreover, the company is enjoying very strong same-store NOI growth thanks to its inflation-linked rent escalators. Combining the 3-5% organic growth rate with the near 7% yield and the strong acquisition pipeline, investors have an attractive total return outlook for the stock without accounting for any potential valuation multiple appreciation potential if/when interest rates begin to decline.

For retirees looking for stable, dependable, and gradually increasing income, WPC is about as attractive as it gets.

#2. Enterprise Products Partners Stock ( EPD )

Perhaps one of the few retiree-friendly high-yield stocks that are potentially better than WPC is EPD. EPD is a well-diversified energy midstream infrastructure business that has arguably the very best management team in the entire industry. It has raised its distribution every year for a quarter-century, insiders own about one-third of the business, and EPD has massively outperformed SPY over the long term:

The business has an industry-best A- credit rating with a very low ~3x leverage ratio and significant liquidity with a well-laddered debt maturity ladder. Moreover, its 7.6% yielding distribution is covered ~1.8x by distributable cash flow and management has been growing the distribution by ~5% annually in recent years and plans to sustain a similar growth rate for the foreseeable future.

It also has an abundance of high-returning, low-risk organic growth projects as well as the potential to continue engaging in synergistic bolt-on acquisitions.

Last, but not least, its cash flows are quite stable given that the vast majority of them are immune to short-term swings in commodity prices and stem from long-term fixed-fee take-or-pay contracts with creditworthy counterparties.

#3. FS KKR Stock ( FSK )

FSK is a business development company (BIZD) with an investment grade credit rating, plenty of liquidity, and the backing of large alternative asset management KKR ( KKR ).

It has a large and well-diversified portfolio that mostly consists of senior secured loans to quality middle-market companies. This results in a stable cash flow profile for the business that supports its near 14% dividend yield. With the vast majority of its loans having floating interest rates, FSK is a nice hedge against a high inflation, rising interest rate environment.

Its most recent quarter saw it generate $0.78 in net investment income, easily covering its $0.64 base dividend by 1.22x and freeing up the business to pay out an additional $0.06 in a supplemental distribution. Meanwhile, investments in non-accrual status comprised 2.5% and 4.8% of the total investment portfolio at fair value and amortized cost respectively on June 30, compared to 2.7% and 5.5% on March 31, 2023, reflecting an improving underwriting picture for the company.

Overall, the biggest appeal of FSK is that it offers investors an incredibly lucrative and sustainable dividend payout and overall providing equity-like returns alongside the security and stability that comes with investing in a broadly diversified and skillfully underwritten portfolio of senior secured debt in quality businesses.

Investor Takeaway

High-yield investing can be extremely rewarding if done properly. As mentioned at the outset, it can enable investors to sleep better at night and maintain a proper mindset during periods of severe stock market volatility. Moreover, it helps investors to make more rational buy and sell decisions since valuating such businesses tends to be much easier than trying to assess the intrinsic value of a high growth, speculative artificial intelligence stock like Palantir Technologies ( PLTR ).

I am buying stocks like WPC, EPD, and FSK hand-over-fist along with dozens of other similar quality, sustainable high yielders in my portfolio, delivering me a well-covered and growing weighted average portfolio yield of ~8% and a ~20% total return CAGR since 2020 . While it may not be as exciting as chasing the latest hot tech stock, I have found high-yield investing through these types of stocks to be an extremely effective way to compound wealth over the long term.

For further details see: