2023-09-27 13:48:15 ET
Summary
- High-yield stocks are currently more attractive than tech stocks because tech stocks rallied this year on no growth, while banks fell on very high growth and energy flatlined.
- Today you can find stocks with very high yields, whose payouts are nevertheless very well covered by free cash flow.
- I explore three quality dividend stocks with yields between 7% and 22%.
High-yield stocks are some of the best equities you can invest in today. There are high-yield names in every market, but today, with financials and (until recently) energy being out of favor, such stocks have higher yields than in recent memory.
Current market conditions lend themselves well to investing in high dividend value names. 2023 so far has seen tech stocks rally on no significant growth, while banks have declined in price despite strong growth, and energy companies have regained the oil prices they need to deliver windfall profits. So, the opportunities in high-yield stocks presently look better than those in expensive tech stocks.
When you invest in high-yield stocks, you need to tread carefully. Very often such stocks are justifiably beaten down or have excessively high payout ratios. Not all high-yield names are in either of those categories, though. In this article, I will explore three stocks whose yields range from 7.7% to 21.6% and are well covered by free cash flow.
Enbridge
Enbridge Inc ( ENB ) is a stock that many Seeking Alpha readers will be familiar with. It gets covered by Seeking Alpha analysts pretty frequently and is a staple of many dividend investors' portfolios.
The basic dividend stats on Enbridge are as follows:
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7.6% yield.
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123% payout ratio.
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$2.62 annual dividend.
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5% five-year CAGR dividend growth.
Right away, we see one potential issue: a high payout ratio. ENB pays more in dividends than it earns in profit, which may indicate a sustainability problem . On the other hand, Enbridge's $0.62 quarterly dividend works out to $2.48 on an annual basis, and Seeking Alpha Quant says that Enbridge had $2.91 in free cash flow ("FCF") per share in the trailing 12-month period. So the FCF payout ratio is healthier, at 85%.
Enbridge's most recent quarter was a mixed showing, with a miss on adjusted EPS and revenue, but a beat on GAAP EPS . The company's balance sheet is fairly strong, with a 1.34 debt/equity ratio and a 0.64 current ratio. These figures would be worse than average for some industries, but are acceptable for the pipeline space, which is characterized by high fixed costs and high debt.
TORM plc
TORM plc ( TRMD ) is a Norwegian shipping company that transports crude oil, gas, and refined products. The company has more than 80 large tanker vessels shipping petroleum products all over the world. The ships range from 45,000 to 115,000 kg in deadweight tonnage ("DWT"), giving the company a massive amount of transportation capacity. And, because it ships petrochemicals across the sea rather than land, it doesn't have to worry about competition from new pipeline projects, like railroads do.
TORM PLC's most recent quarter beat analyst expectations, delivering metrics like:
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$308 million in earnings, up 47%.
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$237 million in EBITDA, up 54%.
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A 33.9% return on invested capital, up from 22.7%.
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$33,600 in TCE per day, up 23%.
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$90 million in free cash flow, down 7%.
Apart from Free Cash Flow, all the earnings metrics grew, showing that TORM's business is developing.
Of particular interest to dividend investors is TORM's yield. The stock pays a $1.50 quarterly dividend, which works out to $6 on an annualized basis. With today's stock price of $27.65, that gives us a 21.6% yield! On top of that, the company trades at a mere 3.24 times earnings , and has a strong balance sheet , with a 54.3% debt/equity ratio.
Oaktree Specialty Lending
Oaktree Specialty Lending Corporation ( OCSL ) is a non-bank lender that lends money to companies going through financial distress. The companies it lends to are certainly "risky," but bonds have priority claims over stocks, and most of OCSL's loans are first or second lien . So, there is significant protection built-in to its portfolio.
Oaktree's most recent quarter was technically a miss , slipping behind analyst estimates on revenue as well as on EPS. However, the quarter nonetheless showed significant growth, as the metrics below show:
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$101.9 million in investment income, up 5.8%.
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$1.32 in investment income per share, unchanged.
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$48.4 million in net investment income, up 5.2%.
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$0.63 in net investment income per share, unchanged.
Overall, some dilution prevented the growth from "trickling down" to the individual shareholder level, but we can see that Oaktree as a whole is developing.
The company's last dividend was $0.55. On an annualized basis that's $2.20, which provides an 11% yield at today's prices. The target payout ratio is 90%, which is a little on the high side, but that's a standard feature with BDCs.
Oaktree Specialty Lending has a pretty healthy balance sheet , with a 1.17 debt/equity ratio and a 3.9 current ratio. The DE ratio suggests just a middling level of indebtedness, but the current ratio implies truly excellent liquidity. On the whole, OCSL is a welcome addition to any dividend-oriented portfolio, as are the other two stocks mentioned in this article. Sometimes when you buy high dividend stocks you risk seeing your payout cut, but the stocks on this list offer a decent combination of yield and safety.
For further details see:
3 Great Dividend Stocks Yielding 7% To 22%