As the broader market continues to hit all-time highs and valuations slowly creep up, it's getting harder and harder to find quality investments with dividend yields higher than 6%. Either stock prices on quality companies have ticked up and lowered yields, or the ones that still have yields this high have serious issues that could lead to cuts to their payouts.
That doesn't mean all companies with yields this high are poor investments; you just have to do a little more digging. Three companies with dividend yields better than 6% that look like interesting investments today are Enviva Partners (EVA), Greenhill & Co. (GHL), and 8point3 Energy Partners (CAFD). Here's a quick look at these three high-yield stocks and why they're worth putting on your radar.
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An oft-overlooked energy source
Enviva Partners plays in a very niche business: manufacturing and selling wood pellets for heating and energy generation. For those who live in the Northern parts of the U.S., chances are you know someone who has a wood pellet stove for home heating. Yes, this is a pretty small market, but that isn't what makes Enviva's business lucrative. The real driver for Enviva is selling wood pellets to Northern Europe as a substitute for coal in power generation.
So, unlike wood pellet sales in the U.S., which are heavily weighted to the winter months, pellets in Europe experience year-round demand, and Enviva has used that market to sign up customers to long-term contracts equal to or in excess of the company's current production capacity all the way out to 2020. With these fixed take-or-pay contracts in place, it makes budgeting and forecasting easy for the company, helping it determine its ability to grow and pay shareholders.
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One of the biggest traps for master limited partnerships such as Enviva is to take on too much debt to grow or to commit too much operational cash flow to distributions to shareholders. While the company is still relatively new to the public markets -- it IPO'd in 2015 -- it has a modest balance sheet and its payout to shareholders is still well below its total available cash. Keeping debt low and retaining cash should give the company ample room to either grow the business organically or possibly acquire some smaller companies in this rather fragmented industry. With a dividend yield of 7.6%, Enviva Partners definitely is worth a look.
Providing a unique service in the financial industry
Greenhill & Co. is an interesting investment in the financial industry. The company is an independent advisory firm that specializes in mergers and acquisitions, restructurings, and initial public offerings. Unlike other large financial institutions that also have trading and sales branches or do underwriting, Greenhill only advises its clients on the best path forward, which significantly removes any conflict of interest it may have with getting a deal done.
For clients, this gives an independent voice, and it is something that more and more companies seek out when looking to make deals. Since Greenhill's inception in 1996, the company has advised on more than $1 trillion in announced mergers and acquisitions. It has built a strong reputation with a deep bench of clients that come back to it repeatedly, including big companies like Alcoa, GlaxoSmithKline, Gannett, Emerson Electric, and Supervalu.
For investors, foregoing the other parts of deal-making like underwriting and investing means a much lower capital structure and much lower risk. That, plus lower compensation and non-compensation ratios than its peers translates to higher pre-tax margins than its biggest competitors. It also helps that, thanks to share repurchases to offset employee compensation, the company's share count has remained rather consistent, while many others in the industry have seen major shareholder dilution over time.
| Company | Change in Diluted Shares Outstanding 2006-2016 |
|---|---|
| Greenhill & Co. | 7.9% |
| Lazard | 157.3% |
| Evercore Partners* | 563.7% |
| Morgan Stanley | 77.6% |
| Bank of America | 141.6% |
Data source: S&P Global Market Intelligence. *Since going public in Q3 2016.
If there is a beef with Greenhill as a dividend investment, it's that the payout has remained flat for years. If you are looking for a high yield that isn't at a big risk of getting cut, though, Greenhill & Co.'s 6.4% yield does look pretty attractive.
A growing industry with a decent yield
Typically a company in a high-growth industry like solar energy would not be a good candidate for a dividend-paying stock. The industry is growing fast and businesses need to plow capital back into themselves to grow capacity or for research and development. What sets 8point3 Energy Partners apart from other solar industry investments is that instead of selling solar panels, it buys them.
8Point3 Energy Partners is in the business of acquiring and operating solar developments such as utility scale solar farms. Those solar assets have buyers of the electricity already signed up through long-term contracts, so the company gets a steady stream of cash that requires little in maintenance spending and can therefore throw off decent amounts of cash back to shareholders.
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One of the major pitfalls for companies structured similar to 8point3 is that their parent companies will sell -- or drop-down -- assets at low rates of return. This was the issue with the now-bankrupt SunEdison and its two subsidiaries. 8Point3 has so far avoided these pitfalls because it has two separate sponsor companies -- SunPower and First Solar. Having two parents prevents one from dropping down at elevated prices and ensures better rates of return. In fact, the recent slump in solar energy has been a boon for 8point3 as it can buy assets for better rates of return.
Like Enviva, 8Point3 Energy Partners is still a young company that could fall into the trap of trying to grow too fast in this booming industry and taking on more debt than it can handle, or grow its payout too fast and not retain enough cash to responsibly grow. So far, though, it has avoided these issues. With a long runway left in the solar space, a much more stable structure for investing in the solar industry, and a dividend yield of 7.6%, 8Point3 Energy Partners should be on your radar.
