6 Stocks to Buy With Dividends Yielding More Than 6%

Image source: Getty Images.

Right now savers would be lucky to earn a measly 1% on money in the bank as a result of the currently low interest rates. That said, with inflation averaging 1.1% over the past year, they would be losing money by keeping it in the bank. There are better options out there for those looking to earn a higher yield, though that bigger reward does come with more risk. Here are six stocks that yield more than 6% for investors willing to take on the added risk:

Data source: YCharts.

What's fueling these yields?

All six companies have one thing in common: They own real assets that generate relatively steady cash flow, thanks to long-term contracts or predictable sales. Seaspan Corporation (ATCO), for example, currently operates 103 containerships, which it leases to customers under long-term time charters. The company has $5.7 billion in contracted revenue, with an average remaining charter length of five years. That gives it clear cash flow visibility well into the future.

ONEOK Partners (OKS) and Medical Properties Trust (MPW -2.53%) operate similar fee-based businesses, underpinned by long-term contracts. In ONEOK Partners' case, it generates stable cash flow by collecting fees for transporting natural gas and NGLs through its 37,000-mile pipeline system. Meanwhile, Medical Properties Trust receives rent by leasing its 248 hospitals to hospital operating companies.

Sunoco LP (SUN -1.25%), Alliance Resources Partners (ARLP 0.60%), and StoneMor Partners (STON) have vastly different business models and therefore don't have quite the same long-term cash flow stability. In Sunoco LP's case, it sells fuel at its 1,340 retail locations, operates retail stores that sell merchandise and food, and distributes fuel to wholesale customers in 30 states. While those businesses generate relatively steady income, it is not quite as stable as fee-based income. Meanwhile, Alliance Resources Partners sells coal to utility customers under long-term contracts. However, while it sold out all 34 million tons of its capacity this year, it has only secured contracts for 23.3 million tons in 2017, with those volume contracts declining further in future years. Finally, lot and merchandise sales, as well as funeral home calls, drive StoneMor's revenue. While those sales tend to be somewhat predictable, they are not entirely stable.

What could go wrong?

For companies like Sunoco LP, StoneMor Partners, and Alliance Resources Partners, it is clear that a decline in sales could impact their ability to maintain their currently generous distributions. That has already been the case at Alliance Resources Partners, which cut its payout by more than 35% earlier this year because of the weak coal market. If the company does not secure customers for the rest of its coal capacity next year, then it is possible that Alliance could cut its payout again.

Meanwhile, MLPs StoneMor Partners, Sunoco LP, and ONEOK Partners have a history of paying out more cash than they bring in, which isn't sustainable over the long term. For example, last quarter StoneMor Partners only generated $16.8 million in distributable cash flow but paid out $23.3 million to unitholders, which it covered because it did not pay out all of its available distributable cash in prior quarters. ONEOK Partners, on the other hand, is finally generating excess cash flow after paying out more than it earned last year.

Aside from the potential for weaker cash flow in the future, the other significant risk for these six companies is their access to capital. Because they all pay such high shareholder distributions, each relies on outside capital to fund growth and refinance debt. That has been a concern at Seaspan Corporation recently because it has eight newbuild containerships scheduled for delivery next year, which will cost it $470 million. If it cannot get the money from banks or outside investors, it could need to cut its dividend to make ends meet. Each of these companies faces similar financing risk, which could cause them to cut their lucrative payouts in the future and divert that cash to fund their capital needs internally.

Investor takeaway

The reason these six companies can pay such high yields is that they currently generate a lot of cash flow, most of which gets paid out to investors. While that strategy is working right now, it might not always work if cash flow drops or if they need it for other things. That is the risk investors need to take for the reward of a yield north of 6%.