Investing in dividend companies can be a lower-stress version of investing. No matter what the share price does, you know that you are going to get a certain percentage return. Ideally, the higher the yield, the better. As the yield gets higher, though, so too does the risk that the company's payout is at risk of getting cut, and that risk can make us lose sleep at night.
So we asked three of our contributors to highlight one stock that has a high yield -- and not one where you need to perpetually worry about a payout cut. Here's what they had to say.
At 4.2%, TransCanada (NYSE:TRP) pays a pretty generous dividend. While it might not be the highest yield in the energy infrastructure sector, it is among the safest in the group. Even better, the payout is expected to grow by 8% to 10% per year through the end of the decade.
TransCanada's dividend is founded upon its predictable cash flow, with 90% of its earnings derived from either regulated assets or long-term contracts. That cash flow is expected to become even more predictable in the very near term because the company is in the process of selling its Northeast power business, which is one of the few areas where its earnings have some variability.
Two other factors that provide additional layers of security for TransCanada's dividend are its A-rated balance sheet and its roughly 2.0 times dividend coverage ratio, which are both among the best in the entire energy midstream sector. The company's strong balance sheet enables it to issue low-cost funding for growth projects and acquisitions, which are a key driver of long-term dividend growth. Meanwhile, the strong coverage ratio supplies the company with excess cash flow to invest in its robust pipeline of growth projects, reducing its reliance on the capital markets.
Bottom line, TransCanada's dividend is one of the safest in the energy sector.
High-yield dividends can be tricky, because a high yield could be a function of a failing business model instead of a well-oiled business with a generous management team or capital structure. One company that stands out as particularly safe in the ultra-high-yield category is StoneMor Partners (NYSE:STON), which is currently yielding 10.5%.
StoneMor Partners is a limited partnership that owns and operates cemeteries and funeral homes. On the surface, this might not seem like the best place to park your money, but it's actually quite the opposite. The cemetery and funeral business is a bet on one of life's very few certainties -- namely, that we all have an expiration date. As the population grows, StoneMor Partners' opportunity to sell cemetery plots and book funeral home business grows with it. Even with pharmaceutical products improving and life expectancies lengthening, StoneMor's business is about as guaranteed as it gets.
Additionally, as a limited partnership, StoneMor is a flow-through entity that distributes its earnings to its shareholders and avoids standard corporate income taxes. This means a hefty dividend for shareholders.
Lastly, StoneMor's earnings weakness in the first quarter, historically the company's weakest quarter, provides a solid entry point for investors. The company's reported 5% decline in cemetery contracts and 27% decrease in funeral home income can directly be tied to inclement weather that makes cemeteries less accessible and reduces preplanned plot purchases. Weather is not a game-changer for this business model.
If you're looking for a high-yield stock you can trust, StoneMor Partners could be worth closer inspection.
One type of high-yield stock you might want to look for is one that is regulated by the government, because the service it provides or the region it serves leads to a monopoly. For Magellan Midstream Partners (NYSE:MMP), that is only one of several reasons it's a high-yield stock that you can sleep well owning.
The company's refined petroleum product network is the largest in the nation, and large parts of that network are designated by the Federal Energy Regulatory Commission as non-competitive regions. Basically, Magellan is the only game in town in these parts of the country, and therefore the tariffs it charges in these regions are set at a rate to guarantee a certain level of return.
This competitive advantage is an incredible cash-generating asset, and Magellan's management has used it well to generate long-term returns. Not only does it pay a decent yield of 4.5%, but management has also retained high amounts of cash to reinvest in new cash-generating assets such as crude-oil pipelines, storage terminals, and export capacity.
Since 2001, Magellan has been able to increase its payout to shareholders like clockwork, and management's plan suggests it will be able to continue this trend for several years. Maybe Magellan's current yield isn't the highest out there today, but it is certainly one that won't keep you constantly checking news feeds to make sure it's on the right track.