There is something comforting about a quality, high-yield investment that can maintain its payouts through thick and thin. That dividend payment of 4%, 5%, or even more makes the ups and downs of the market seem much less stressful since you know you are going to get a return in cash or even in more shares.
The key word in that first sentence is quality. Any company can try to pay a high yield, but only well-positioned ones with strong cash flows have the ability to keep those payments going for years into the future. Three that look to be strong high-yield investments are healthcare REIT HCP Inc. (HCP 0.77%), oil and gas transportation and logistics specialist Holly Energy Partners (HEP +0.00%), and telecom giant Verizon Communications (VZ +1.76%). Here's why investors should consider these three stocks for their high-yield portfolios.
Image source: Getty Images.
A REIT with a huge demographic shift on its side
There is one undeniable fact that anchors an investment thesis in HCP: The elderly population in the U.S. is growing fast. Overall population growth coupled with increasing life expectancy means that the elderly population of the U.S. is expected to grow from 43.1 million in 2012 is to 83.7 million by 2050. With increased age also comes increased demand on healthcare services and the infrastructure behind it.
One of HCP's senior living properties. Not what you think of when you think healthcare facilities. Image source: HCP investor presentation.
This is the market HCP is looking to fill but in a targeted way. HCP's profile of healthcare services businesses includes retirement and assisted living facilities, life sciences labs, and doctors' offices. The tenants of these buildings are mostly private clients vs. clients who are supported by government reimbursement systems like Medicare. By eschewing facilities that are more reliant on government payments, HCP has more pricing power and therefore a more stable revenue structure.
The company has made several moves to improve its financial standing and lower its exposure to a single customer. As a result of these moves, it now has an investment-grade credit rating. With the market for healthcare-related real estate being as fragmented as it is, there are plenty of opportunities to make some acquisitions with its financial firepower. On top of it all, HCP has a 30-year history of increasing its dividend payments to investors -- when adjusting for its most recent spinoff. All of these elements make HCP look like a decent investment, and its 4.9% dividend yield makes it look pretty attractive right now.
The little MLP that could
When investing in master limited partnerships and the energy infrastructure business, it helps immensely to be a larger company. Larger business tend to have a more diverse customer base (lower risk of counterparty default), a larger network with more options for customers (better pricing), and can get better rates when raising capital (a critical function to grow operations). So with a market capitalization of just $2.1 billion, it would seem that Holly Energy Partners would not be in the conversation as a high-quality, high-yield MLP.
For what the company lacks in size and scope, it makes up for it with extremely prudent financial management. The company eschews any opportunity or risk associated with commodity prices by locking in its customers with tolling agreements and contracts that are 100% fixed fees with strong minimum volume commitments. So, with little guess work related to its revenue, management is able to budget its payout and growth in a way that it keeps debt at modest levels and it doesn't need to rely as much on outside capital to grow even compared to some of its larger peers. So even with its much smaller size, the company has been able to maintain a modest balance sheet and keep share issuance down.
| Company | Debt to EBITDA |
|---|---|
| Holly Energy Partners | 4.0x |
| Plains All American Pipeline | 6.1x |
| Buckeye Partners | 4.1x |
| Genesis Energy | 6.7x |
Data source: S&P Global Market Intelligence.
HEP average diluted shares outstanding (quarterly) data by YCharts.
On top of it all, management has also been able to raise its distribution to shareholders every quarter since its IPO in 2004. So with a distribution yield of 7.2% today, Holly Energy Partners looks like a great high-yield investment.
It's good to be the king
When it comes to telecommunications providers, size matters a lot. That is what makes Verizon one of the more compelling companies in the industry. The company routinely has the best network coverage in the U.S. It also happens to have the largest customer base with the lowest churn rate, which means that customers are choosing Verizon over new competitors.
The reason this matters is that we are on the precipice of a rapid expansion of data usage and a buildout of the next generation of coverage: 5G. Delivering on this new network speed is going to take a lot of invested capital, and that is where being the biggest player in the business pays off immensely. Verizon's $28 billion in cash from operations gives it a huge leg up as it starts to make the massive investments that it will take to build out that next-generation network.
Of course, Verizon is much more than just a wireless communications provider as it also provides wired service for internet, phone, and cable. Like wireless, though, this is a relatively stable customer base that only supplements its cash flow. The real question for the company's future is its investments in media and content through its acquisition of AOL and the pending purchase of Yahoo!. There is some risk that these investment may not pan out as one might hope, but the base from which Verizon generates profits and cash flow does look sustainable for at least the next few years. Add a dividend yield of 4.4% and Verizon looks like a decent bet for those looking at high-yield stocks.
