Starved for yield? As the stock markets are hovering around all-time highs and money managers are pouring money into bonds, there are certainly fewer high-yield investments out there. That doesn't mean they are impossible to find, though. These three stocks, Enterprise Products Partners (EPD 0.30%), 8Point3 Energy Partners (CAFD), and Enviva Partners (EVA), have yields better than 6% and actually look like they can maintain their payouts. Here's a quick rundown as to why these three stocks should be on your radar if you are looking for high-yield investments.
The flag bearer for high-yield investments
Enterprise Products Partners is, in my opinion, the gold standard investment in the oil and gas midstream business. The company has all the qualities you want in this kind of business: a stable profit margin business model that is supported by contracts with little exposure to commodity prices, a modest balance sheet, an investment-grade rating that is so rare among master limited partnerships, a management team that has for years been a great steward of shareholder value through prudent capital management, and a decently high yield that has grown every quarter for 48 quarters in a row.
After reaching highs back in 2014, shares of Enterprise have hit a bit of a bump in the road. At first, investors were pessimistic about oil prices and any business remotely associated with the commodity in general. Then, the highly publicized cut of Kinder Morgan's dividend led to worries about the balance sheet of pipeline companies. After Enterprise passed both of these tests, as it has shown to have a business mostly insulated from commodity prices and a very manageable debt load, it seems that today's crisis du jour is fear of rising interest rates. Yet in the 18 years Enterprise has been public -- and the 40-plus years of its existence -- changing interest rates have not had that much of a material impact on the company's ability to do business.
So let the market worry about what the Federal Reserve will do next. The temporary uncertainty is providing yet another window where investors can pick up shares of Enterprise Products Partners that today yield 6.2%
A solar investment that actually puts cash in your pocket
Investing in solar has been a challenge in recent years. Even though the industry as a whole has been growing at a staggering pace, few publicly traded companies have been able to turn that into profits and cash generation for shareholders. One investment that is bucking this trend is yieldcos. These entities are set up to own and operate completed solar projects that have long-term electricity contracts in place. With the facilities completed, there is little in terms of development and capital spending, which allows the yieldco to pay out decent dividends to investors.
Looking for a decent yieldco investment is much like choosing a pipeline company. You want stable cash flows that more than support the payout, a reasonable balance sheet, and a management team that will be a decent steward of shareholder interest. One yieldco that looks promising in this regard is 8point3 Energy Partners.
I'll admit that, today, it's a little hard to feel 100% confident in the company because it has only been a public entity for a little more than a year and it doesn't have a whole lot of financial history to evaluate. There is also the fact that the initial results so far have been obscured by some early deals between it and its parent companies First Solar and SunPower. However, there are some promising signs. The first is that the two parent entities are some of the better operators in the solar space that have maintained more financial discipline than most others in the industry, and its most recent financial statements show rapidly growing cash from operations that more than adequately supports its current payout.
Maybe it's worth waiting to see how the company funds its growth in the coming quarters and that it doesn't become overly reliant on debt to fuel its growth, but the signs so far are promising, and a 6.2% yield today looks pretty attractive.
Young, but promising
Like 8point3 Energy Partners, Enviva Partners is a young company. It only went public in 2015, so there isn't a whole lot of historical information on how the company handles the ups and downs of the market. However, the company does show some qualities that investors would want in a stock that yields a whopping 7.8%.
Enviva Partners is a unique business. It manufactures and sells wood pellets. These are an attractive heating option in places like the Northeast, but Enviva Partners' real opportunity lies in exports that are used in place of coal for power generation in places like the U.K., the Benelux and Scandinavian countries, and Japan. What makes the company look to have a promising future as a high-yielding stock is the fact that about 100% of its production capacity is contracted beyond 2020 and the average length of its existing contracts is 9.6 years.
The other aspects of the business that look compelling today are the financials and the company's current payout policy. Today, net debt to EBITDA stands at 2.41, a very reasonable rate for a master limited partnership. It's also promising that the company's distribution coverage ratio -- the amount of cash it brings in available for distribution divided by the amount it pays -- is a reasonable 1.5. This gives Enviva some wiggle room to grow its payout or grow the business with retained cash.
Based on management's projections, demand for wood pellets is expected to increase considerably in the coming years, so there is ample room for growth. The one reason to be apprehensive is that we have yet to see how the company manages its business and distribution growth. As long as Enviva maintains this comfortable cash cushion between what comes in and what goes out the door, it could be a very compelling investment.