Investors venturing into the large dividend territory where yields are in excess of 6% are getting into some pretty speculative stocks. With valuations in the U.S. running high, there aren't a whole lot of stocks with yields this high that are no-brainer investments. However, there are some stocks in the better-than-6% range that are still worth a look.
Three high-yield dividend stocks that stand out today are Holly Energy Partners (HEP), Enviva Partners (EVA), and Apollo Investment Corporation (AINV -0.07%). Here's a quick rundown on each company and why you may want to consider them for your own portfolio.
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Punching above its market cap
Typically a company paying a high yield will be one that has a large market cap, especially one in an industry like the oil and gas transportation and logistics business. Yet with a market cap of $2.1 billion, Holly Energy Partners has shown for more than a decade that its business model can support its current yield just north of 7%.
Other master limited partnerships leave a little guesswork -- and hope for larger gains -- by having a small portion of their revenue come from services tied to commodity prices. Typically, this is in the range of 10%-20%. Holly Energy Partners takes all of this guesswork out of things and contracts 100% of its services with fixed-fee structured contracts. This ensures that there is very little volatility in the amount of money coming in the door at any given time and makes it much easier to budget and forecast its payout to shareholders.
It also helps that Holly Energy maintains a modest debt structure. As of today, the company's debt-to-EBITDA ratio is 4.7 times, which is a little on the high side for it historically. This is because the company made a major dropdown acquisition in the third quarter of 2016 that required additional debt. Based on the decent uptick in EBITDA in the fourth quarter, we can reasonably expect this debt metric to go down again. This is important for investors because a company of this size cannot afford the higher debt levels that we see at some of the larger master limited partnerships out there.
The combination of strong contracts that ensure steady cash coming in the door and a modest approach to growth and balance sheet discipline has allowed the company to raise its distribution for 49 quarters in a row. Based on Holly Energy Partners' performance, it's pretty reasonable to assume that it will be able to keep this up for many more quarters into the future.
Wood: The other alternative energy
When most people think of alternative energy, the first thought is always wind and solar. One other option that frequently gets overlooked is biomass, namely wood and wood pellets. While it is a combustible product like fossil fuels, wood pellets are becoming a major alternative renewable energy for places like the Nordic countries where solar and wind aren't as attractive options. In fact, more than 40% of Europe's renewable energy comes from biomass rather than other forms of energy. Enter Enviva Partners and the business of producing wood pellets.
There is one key trait that Enviva Partners shares with Holly Energy Partners: It contracts all of its production on long-term take-or-pay contracts that ensure a stable revenue flow. As of the company's most recent investor presentation, Enviva's existing contracts cover all of its current production capacity with an average remaining life of those contracts being 9.6 years. It's also encouraging that the company has so far maintained a decent-looking balance sheet while growing rather quickly to fulfill fast-growing demand for wood pellets. After all, U.S.-based pellets are much more cost advantaged than those in Europe.
With a long runway of existing contracts and a decent slate of growth available -- the company will take possession of a new processing plant and an export terminal from its parent organization once construction is complete -- Enviva looks like a rather compelling investment today. With a dividend yield of 7.4%, this may be a high-yield stock worth a look.
A little variability with a very high yield
Investments in master limited partnerships and the energy business have been a popular place to find high yield is because the energy industry has been out of favor. Business development company Apollo Investment, on the other hand, has been on the upswing, and its dividend yield has been on the decline for more than a year. That being said, its yield still stands at a rather impressive 9.5% today.
Apollo Investment is in the business of providing financing for companies that are too large to go to a bank and ask for a simple loan, but are too small to go to the capital markets all by themselves. As a result, it has a portfolio of mostly secured debts such as loans secured by assets, airplane leases, or specialty finance. As it stands today, Apollo Investment holds a $2.5 billion portfolio in 85 unique companies.
Apollo had fallen out of favor in recent years, as the portfolio had a high exposure to the oil and gas industry, which made investors fearful of high default rates on those debts. In response, the company has been actively trying to lower its exposure to oil and gas investments, and is looking to transition more of its current portfolio from specialty finance to secured corporate debt. In doing so, it will lower the portfolio's risk.
The risk of default from oil and gas investments has dissipated significantly, and the company is in a strong position leverage-wise, with net leverage of about 0.66 (by law, business development companies such as Apollo are required to maintain a net leverage of less than 1). Also, since the company's stock is trading at less than book value, management is able to buy back stock at a cheap valuation (while staying below the net leverage threshold).
Because of the nature of the business, Apollo Investment isn't going to have a steadily growing dividend like Holly Partners, but with a yield north of 9%, it doesn't require much growth to obtain large returns. Also, with a low net leverage rating, the company has quite a bit of dry powder if it wants to get aggressive about buying new debt. All of this suggests that if you want to take a flyer on a real high-yield investment, Apollo Investment may be worth a look.