In a market with low interest rates, it can be hard to find steady long-term cash flows. For those looking for the cash flow of high dividend yield stocks, there are some good options if you know where to look.
Five of our contributors picked their favorite high yield dividends and explain why you may want to put Cedar Fair, L.P. (NYSE:FUN), General Motors Company (NYSE:GM), Medical Properties Trust, Inc. (NYSE:MPW), Pattern Energy Group Inc (NASDAQ:PEGI), and ExxonMobil Corporation (NYSE:XOM) on your list.
A hidden energy dividend
Travis Hoium (Pattern Energy): The yieldco market has taken a beating over the last year, but it's still built for the long haul. For instance, Pattern Energy has 2,644 MW of renewable energy projects, most of which have contracts to sell energy to a utility or large corporate customer for over a decade. This gives long-term cash flows to pay dividends. And Pattern Energy's dividend currently stands at a 8.2% yield.
What Pattern Energy plans to do long-term is issue more equity and project debt to fund more acquisitions. And if returns are right it can do that, although it would be tough to accretively buy projects with an 8.2% dividend yield. If the stock doesn't rise, the alternative is that management just pays out excess cash flow as a dividend and investors make a return off the payout.
This creates a situation where the best case scenario is that you buy a stock that pays a strong dividend, the stock rises, and higher stock price leads to more dividend growth -- rinse and repeat. The worst case scenario is that you just collect the current dividend for 15-20 years. The rate of return on just collecting the current dividend for 20 years with no growth in stock value at the end of that time is 5.3%, better than owning treasuries. That's not bad for what should be the company's worst case scenario.
A monopoly in plain sight
Brian Feroldi (Cedar Fair): Building an amusement park from scratch requires hundreds of millions of dollars and years of development time, not to mention a boatload of government permits. These realities make getting into this business incredibly difficult, which is wonderful news for established players. In fact, the limited competition provides existing parks with monopoly-like status in the regions where they operate, which leads to pricing power.
Cedar Fair is a publically traded amusement park operator that has greatly benefited from these industry dynamics. The company owns 11 popular amusement parks are spread across the U.S. and have proven to be quite popular. In fact, last year the company welcomed more than 25 million visitors, which was a new record.
Looking ahead, Cedar Fair has a number of initiatives in place that should allow the company's financial statements to flourish. Beyond introducing new rides, the company is rolling out limited-time events in the off season that are designed to increase visits and encourage season pass ticket sales. When combined with modest price increases, Cedar Fair looks well positioned for steady top-line growth in the years ahead.
Cedar Fair is structured as a master limited partnership, or MLP, so it is required to pass on the majority of its profits to investors in the form of dividend payments. The stock currently yields 5%, which is an attractive rate for such a company with such strong assets.
Before you jump in, you should know that buying an MLP like Cedar Fair means that you will have to fill out some extra paperwork at tax time. If you're OK with that small clerical hassle, then I think Cedar Fair is a terrific high-yield stock to consider.
Facilities for an industry always in demand
Chuck Saletta (Medical Properties Trust): Health care is an industry that's hard to offshore and that people will use no matter what the economy is doing to their incomes. That makes Medical Properties Trust an intriguing high yield investment: it's a Real Estate Investment Trust that owns and leases out properties that serve the healthcare industry.
Medical Property Trust currently sports a yield above 7.4%, and it has been slowly restoring its dividend since cutting it during last decade's financial crisis. As a REIT, Medical Properties Trust must pay out at least 90% of its income as a shareholder distribution, but like many REITs, its distribution actually exceeds its accounting income.
Despite that high payout on an earnings basis, Medical Properties Trust's dividend is covered by its operating cash flows and funds from operations. Due to the capital-intensive nature of the real estate business, the company reports around $96 million in non-cash depreciation expenses, explaining why net income is so far below those other measures.
Further supporting the company's ability to pay those distributions, Medical Property Trust has only moderate levels of leverage on its balance sheet. Its debt to equity ratio is around 0.9, and it has a current ratio above 5, showcasing its solid financial foundation. So not only is its distribution covered by its operations, it looks to be in a solid enough financial position so that its distribution doesn't look like it's at near term risk due to financing concerns.
While the Medical Properties Trust's dividend looks supportable, there's no guarantee that its share price will remain stable. As interest rates rise, bonds will become more attractive for income seekers, putting pressure on the prices of high yielding stocks like this one. Still, if you're looking for current income from your investments and are OK with that potential volatility, Medical Properties Trust certainly looks like it's worth considering.
John Rosevear (General Motors): We all know that self-driving cars and new tech-enabled forms of personal mobility are going to disrupt and transform the auto business as we've known it for many years. So why am I suggesting you buy General Motors -- of all companies! -- right now? Two big reasons:
- It's cheap at 5.7 times 2016 earnings, and has a fat (and sustainable) 4.4% dividend yield;
- Aside from a certain well-hyped Silicon Valley upstart, GM might be the most forward-thinking automaker in the world. Yes, really.
Lots of automakers are talking about their visions of "mobility" right now -- concepts like ride-hailing and car-sharing that will be enabled by the advent of highly interconnected self-driving electric vehicles. For most automakers, that's still mostly talk. But under CEO Mary Barra, GM has been taking action:
- GM owns 9% of ride-hailing start-up Lyft, and is supplying Lyft drivers with vehicles at discounted rates;
- GM's longtime OnStar program is being greatly expanded into a full-blown connected-vehicle network;
- GM founded and owns Maven, a fast-growing urban car-sharing company;
- GM's self-driving research and development effort is very advanced;
- GM is already shipping an affordable 238-mile-range electric car.
That electric car, the Chevy Bolt, is the key to GM's future vision in ways that investors haven't yet realized. The Bolt is the foundation -- the "platform", as GM insiders say -- for the electric self-driving summoned-by-smartphone-app car service that all those other automakers and tech experts are talking about as some future thing that might arrive next decade.
But GM's shipping it today. Soon, according to reports that GM pointedly isn't denying, GM and Lyft will roll out thousands of Bolts equipped with a prototype Level 4 self-driving system. Those Bolts will go into service with Lyft and gather the data needed to turn that prototype system into a production-ready one -- and do it sooner than most expect.
That's the future everyone is talking about, and GM is making it happen right in front of us. The market hasn't quite caught on yet, and that means there's an opportunity.
Give your dividend portfolio more energy
Dan Caplinger (ExxonMobil): The energy industry has been a hotbed of dividend income lately, but you have to choose high-quality stocks in order to feel confident about their ability to sustain and grow those quarterly payouts over time. ExxonMobil is a logical choice for those investors seeking stocks with unquestionable blue-chip status, given its position atop the industry and the breadth of its integrated oil and gas operations. With operations across the globe and plenty of growth prospects, ExxonMobil has been able to make it through tough industry conditions without the disruptions that smaller players have seen.
ExxonMobil currently yields 3.7%, and it also has an impressive track record of annual dividend increases that stretches back for 34 years. Traditionally, Exxon tends to boost its quarterly payouts toward the end of April or the beginning of May, and it's reasonable to expect that trend to continue this year. Given last year's modest increase of just 3%, ExxonMobil probably won't reward investors with a huge hike in 2017. But over the long run, dividend growth has been extensive, and the fact that Exxon hasn't seen a big move higher over the past year suggests that a rebound could still be in the cards for the oil and gas giant.
Brian Feroldi has no position in any stocks mentioned. Chuck Saletta has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. John Rosevear owns shares of General Motors. Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Cedar Fair. The Motley Fool has a disclosure policy.