9 High-Yield Stocks Doling Out 5% or More | Kiplinger

9-high-yield-stocks-doling-out-5%-or-more-|-kiplinger

When you’re seeking out high-yield stocks, remember: You need more than headline yield – you also need an element of safety.

In today’s world, which is characterized by historically low interest rates, stocks with eye-popping dividend yields are often too good to be true. From dangerous debt loads to businesses in secular decline, high-dividend stocks require extra scrutiny to avoid investing in yield traps. That goes doubly for investors looking for retirement stocks capable of producing income for decades down the road.

Research firm Simply Safe Dividends developed a Dividend Safety Score system to separate stocks with safe dividends from those that are more likely to cut their payouts over a full economic cycle. By focusing on companies with more conservative payout ratios, stronger balance sheets and business models that generate predictable cash flow, investors can improve their chances of selecting dependable income investments.

With these qualities in mind, here are nine of the best high-yield stocks on the market today. Caution is always advised when considering investments with yields this elevated. But the companies featured here appear better positioned to continue paying a high level of income than many other stocks boasting similar yields. Specifically, the following picks not only sport dividend yields between 5% and 9%, but also pass muster with SSD’s Dividend Safety Score system. 

Data is as of Jan. 23. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Dividend growth streaks are calculated by using total dividends paid each fiscal year. Companies are listed in reverse order of yield.

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Philip Morris InternationalGetty Images

Market value: $160.2 billionDividend yield: 4.9%*Dividend growth streak: 13 yearsSector: Consumer staplesPhilip Morris International (PM, $102.92) was formed in 2008 when Altria (MO) spun off the international rights to Marlboro and the rest of its well-known cigarette brands. The tobacco business is characterized by low capital intensity, strong pricing power and excellent brand loyalty due to the addictive nature of nicotine.

These qualities, along with Philip Morris’s strong market share position in premium cigarettes, have helped the tobacco giant raise its dividend each year since 2008 – resulting in a compound annual growth rate (CAGR) of 8% – while also providing cash flow to invest in nicotine markets of the future.

Unlike some of its peers, Philip Morris acknowledges that the world is likely headed toward a smoke-free future in the long term. The company has responded by pouring billions of dollars into so-called reduced-risk products, with a focus on heated tobacco.

Thanks to these efforts, Philip Morris generates close to 30% of its net revenues from smoke-free products and seeks to obtain most of its sales from these products by 2025. As more smokers shift to reduced-risk products over the next decade, Philip Morris will be there to serve their needs. 

PM should also remain one of the best high-yield stocks for retirees seeking to live off dividends in retirement, as Simply Safe Dividends discussed.

*PM yielded 5% as of stock selection

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Main Street CapitalGetty Images

Market value: $3.0 billionDividend yield: 6.1%Dividend growth streak: 14 yearsSector: FinancialsAs a business development company (BDC), Main Street Capital (MAIN, $42.41) serves an important role in the economy by providing debt and equity capital to relatively small companies that are underserved by the traditional financing options offered by banks.

These businesses are often highly levered and can face substantial pressure during economic downturns, putting even more importance on Main Street’s underwriting skill and financial practices. Fortunately, the company has excelled in both areas.

Main Street spreads its bets over nearly 180 portfolio companies to reduce risk, with no individual company exceeding 2.5% of the portfolio’s fair value. No single industry exceeds 7% of the portfolio’s cost basis either, and investments are spread across the U.S.

Maintaining a diversified portfolio and an investment-grade balance sheet reduce Main Street’s risk. The firm also retains a portion of gains realized upon the exit of a successful investment. These funds provide a cushion during downturns when credit losses spike.

Management’s disciplined approach has allowed Main Street to pay its regular monthly dividend without interruption since 2007. This track record is among the best of any business development company and helped Main Street earn its spot on Simply Safe Dividends’ list of its top 20 high-dividend stocks.

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Kinder MorganGetty Images

Market value: $39.4 billionDividend yield: 6.2%Dividend growth streak: 4 yearsSector: EnergyKinder Morgan (KMI, $17.37) has come a long way since disappointing income investors with a 75% dividend cut in 2015. Back then, the midstream infrastructure company was saddled with debt and depended on issuing equity to fund a slate of aggressive growth projects tied to America’s surging energy production.

After oil prices tanked and investors soured on the midstream industry, cutting off Kinder Morgan from equity financing, management opted to cut the dividend to keep funding the firm’s expansion plans while protecting its credit rating.

Since then, Kinder Morgan has dialed down its growth ambitions and moved to a self-funding business model, which eliminates the need to issue equity. Management has also significantly paid down debt and improved Kinder Morgan’s credit rating by one notch to BBB.

Kinder Morgan’s vast collection of pipelines, storage facilities, and terminals is backed by long-term contracts as well, and over 90% of its cash flow is supported by take-or-pay provisions or fee-based agreements.

Combined with Kinder Morgan’s healthy payout ratio, which sits near 50%, the midstream giant is one of the best high-yield stocks for investors who are comfortable with the industry’s staying power.

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Pembina PipelineGetty Images

Market value: $17.0 billionDividend yield: 6.4%Dividend growth streak: N/ASector: EnergyFounded in 1954, Pembina Pipeline (PBA, $30.85) is one of Canada’s oldest and largest midstream service providers. The firm’s pipelines, storage facilities and processing plants serve as a one-stop shop to help energy producers move their hydrocarbons produced throughout western Canada to markets around the world.

Pembina’s essential infrastructure assets are backed primarily by long-term contracts with take-or-pay or cost-of-service provisions. Along with management’s focus on working mostly with investment-grade customers, which account for roughly 75% of the company’s credit exposure, these traits have helped Pembina pay uninterrupted dividends since 1998.

While the long-term outlook for fossil fuel demand remains somewhat fuzzy, Pembina’s investment-grade balance sheet, conservative payout ratio policy and positioning on top of key shale basins seem likely to keep the firm’s monthly dividend on solid ground for the foreseeable future.

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Ares CapitalGetty Images

Market value: $10.0 billionDividend yield: 7.8%Dividend growth streak: 1 yearSector: FinancialsFormed in 2004 by alternative investment firm Ares Management (ARES) to engage in corporate lending activities, Ares Capital (ARCC, $21.00) has grown to become the largest business development company in the U.S.

As the biggest firm in its industry, Ares Capital enjoys a substantial capital base that can serve private businesses of almost any size and encourage long-term relationships by providing funding over a firm’s entire life cycle.

The company’s sponsor and external manager, Ares Management, provides additional advantages given its vast reach across credit, private equity and real estate markets. This substantial deal flow generation helps Ares Capital be more selective with its underwriting.

Combined with a diversified portfolio that has not bet more than 2% of its value on any single investment, a focus on less risky first-lien secured loans, and an investment-grade balance sheet, ARCC is one of the more durable BDCs out there. And it has paid stable or increasing dividends for more than a decade.

However, investors should understand that companies in this industry are often hit hard during recessions, which Simply Safe Dividends reviewed in its overview of business development companies.

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Enterprise Products Partners LPGetty Images

Market value: $51.9 billionDistribution yield: 7.8%*Dividend growth streak: 23 yearsSector: EnergyAnother energy stock making the list is Enterprise Products Partners LP (EPD, $23.80) a fully integrated midstream energy company with approximately 50,000 miles of pipelines, numerous storage facilities and processing facilities, and other infrastructure across the U.S., with a focus on the Gulf Coast.

Morningstar sector strategist Stephen Ellis believes the publicly traded partnership’s asset and geographical diversity will help it grow in virtually any environment. Mr. Ellis also notes that Enterprise has best-in-class assets at nearly every point in the midstream value chain.

EPD clearly belongs among other high-yield stocks thanks to its nearly 8% in annual income. But it’s also a payout stalwart. Combined with the firm’s conservative payout ratio, investment-grade balance sheet and annuity-like cash flow, Enterprise has delivered higher distributions for 23 consecutive years – a streak the company should have no trouble defending.

* Distribution yields are calculated by annualizing the most recent distribution and dividing by the share price. Distributions are similar to dividends but are treated as tax-deferred returns of capital and require different paperwork come tax time.

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Starwood Property TrustGetty Images

Market value: $7.3 billionDividend yield: 8.0%Dividend growth streak: 0 yearsSector: FinancialsFounded in 2009 amid the depths of the financial crisis, Starwood Property Trust (STWD, $24.05) was formed by its external manager, Starwood Capital Group, to provide alternative commercial mortgage financings as traditional lenders withdrew from the market.

Today, Starwood Property Trust is one of the largest commercial mortgage real estate investment trusts (mREITs) in the U.S., with a portfolio worth more than $20 billion. (Mortgage REITs differ from traditional REITs in that they typically don’t own actual properties, but instead “paper” like securitized mortgages.) Most of the company’s profits are generated from commercial lending, with a focus on less risky first-lien mortgages. Starwood also invests in and services commercial mortgage-backed securities, rents out real estate, and conducts residential and infrastructure lending operations.

The firm’s portfolio is well diversified and conservatively underwritten. For example, within the commercial lending segment, Starwood holds over 130 commercial loans, and no property type exceeds 30% of the portfolio’s carrying value. This business also has a weighted average loan-to-value ratio of 60%, providing a healthy margin of safety to recoup capital in the event of a default.

Starwood’s leading scale, diversified portfolio and relatively conservative lending practices helped the firm maintain its dividend throughout the pandemic recession. While the business remains volatile, Starwood’s dividend might appeal to risk-tolerant investors.

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Arbor Realty TrustGetty Images

Market value: $2.6 billionDividend yield: 8.5%Dividend growth streak: 9 yearsSector: FinancialsArbor Realty Trust (ABR, $17.02), another mREIT, was started in 2003 with a small portfolio of bridge loans provided to real estate owners and developers in need of short-term financing. The company’s operations have since grown to include a large agency business, which primarily earns recurring fees by originating, selling, and servicing multifamily mortgage loans.

Mortgage servicing fees account for the bulk of the agency segment’s revenues, providing a solid foundation of cash flow while also reducing Arbor’s sensitivity to interest rates from its lending business. Thanks to diversified income streams, Arbor has been able to grow its dividend each year since 2012. And despite easily qualifying for this list of high-yield stocks thanks to its 8%-plus yield, ABR nonetheless boasts one of the lowest payout ratios in the industry.

Arbor is solid pick among mREITs, as it focuses on a more stable property class – multifamily assets such as apartments – and its large mortgage servicing business reduces Arbor’s earnings volatility. These qualities improve Arbor’s chances of continuing to maintain its dividend over a full cycle.

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Magellan Midstream Partners LPGetty Images

Market value: $10.1 billionDistribution yield: 8.7%Dividend growth streak: 20 yearsSector: EnergyMagellan Midstream Partners LP (MMP, $47.51), another MLP, owns pipeline systems that transport gasoline, diesel fuel, and other refined petroleum products as they make their journey from refiners to gas stations, truck stops and other end users.

In addition to transporting refined products, Magellan owns oil pipelines that generate most of their cash flow from fixed-rate transportation and storage contracts. This arrangement minimizes the firm’s direct exposure to fluctuations in the price of oil, reducing risk.

The coronavirus pandemic disrupted Magellan’s business as government-mandated shutdowns resulted in fewer cars on the road and lower demand for refined products. However, the company’s strong balance sheet and conservative payout ratio enabled Magellan to maintain its high payout and even raise its distribution in October 2021 to keep its 20-year growth streak alive.

Magellan’s distribution seems likely to remain dependable. Morningstar’s Stephen Ellis, a sector strategist, believes Magellan has a wide economic moat thanks to the lack of alternatives for its refined product pipelines.

“We forecast returns on invested capital to remain well ahead of Magellan’s cost of capital because of the minimal reinvestment needs of the refined product business,” he says.

Magellan’s operations should remain a cash cow, and at 8.7%, MMP is one of the most generous high-yield stocks you can find.

Brian Bollinger was long PM and MAIN as of this writing.


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