The only thing better for your portfolio than a dividend stock that can grow over the long haul is a high-yield dividend stock that can grow over the long haul. Finding those kinds of stocks can be challenging, though, because the combination puts a lot of pressure on management teams to balance the need to throw large sums of cash at investors every quarter with the need to grow the business to support those sizable payouts.
We asked three of our contributors to each highlight a high-yield stock that they think is worthy of a long-term investment. Here's why they picked Omega Healthcare Investors (OHI -0.03%), Enterprise Products Partners (EPD 0.30%), and Ford Motor Company (F 1.76%)
A healthcare business aiming at a sizable demographic
Chuck Saletta (Omega Healthcare Investors): An often-quoted statistic is that baby boomers are reaching age 65 at a rate of around 10,000 per day. While most people who reach 65 are still able to live independently, many of those who survive much longer end up needing help with the activities of everyday living. That's what makes Omega Healthcare Investors (OHI -0.03%) a compelling high-yield potential investment.
Omega Healthcare Investors primarily invests in long-term care facilities -- those places that house and take care of people who are no longer able to manage their everyday lives on their own. The vast majority of people in nursing homes and residential long-term care facilities are over 75 years old, so as boomers age, demand for Omega Healthcare Investors' services will likely continue to grow.
The company currently pays a $0.63 per-share dividend each quarter, and it has been recently raising that dividend a little bit every quarter, though there is no guarantee it will keep up that trend. At recent prices, that puts Omega Healthcare Investors' yield at around 7.8%. As a real estate investment trust, Omega must pay out at least 90% of its earnings as dividends, and its current dividend pays out more than 100% of its net income to shareholders.
Despite that high payout ratio, Omega Healthcare Investors' dividend is still covered by its cash from operations. The company does regularly both borrow money and issue new shares of stock to cover its expansion costs, so you'll need to be prepared to accept that dilution and balance sheet impact.
As long as the company continues to have profitable expansion plans, that borrowing and share issuance can be reasonable means of financing its growth. If you do buy, you'll want to keep an eye on the company's funds from operations growth rate and its debt coverage ratios to assure that its underlying business justifies the financing choices. Still, it's hard to find a nearly 8% yield on a security that has the opportunity to increase its payments, but Omega Healthcare Investors looks like it might fit that bill.
A high yield that shows no signs of slowing down
Tyler Crowe (Enterprise Products Partners): One of the more underappreciated qualities in a stock is consistency from quarter to quarter. Without the excitement of the stock hitting the news cycle every day, some investors will leave a company for dead. That seems to have been the case for Enterprise Products Partners for the past three years. Even though management hasn't wavered from its plan of raising the payout each consecutive quarter at an annual rate of 5%, Wall Street got bored with the company and sold shares to chase some fabled unicorns.
That sell-off of Enterprise's stock and the higher distribution means investors can pick up shares at a dividend yield of 6.1%. That's an incredibly attractive yield for a company that is very well positioned to grow its business now that American oil and gas production is getting back to pre-crash highs. Over the past quarter, management has already green-lit an additional $500 million in capital spending to improve energy infrastructure between the Permian Basin and demand centers in the U.S. Gulf Coast.
As is the case with all other growth plans at Enterprise, management expects to fund a decent chunk of those new projects with internally generated cash flows. This is a trait that sets Enterprise apart from other pipeline companies, which rely almost wholly on external capital to fund development. It's the exact same way Enterprise has grown the business for decades, and it's probably the way management will continue to do so in the future.
Wall Street may find it dull for a company to do the exact same thing for years and produce the same predictable results, but that is exactly what dividend investors want. If you want a high-yield stock you can buy now and depend upon for years into the future, take a look at Enterprise Products Partners
A 5.4% dividend -- and an intriguing growth plan
John Rosevear (Ford Motor Company): It may not seem like a good time to buy an automaker. Sales are slipping, discounts are rising, and the need to make big investments in future technologies is growing urgent. Add that up, and it sure seems likely that bottom-line growth will be scarce for a while.
That's all valid. But at current prices, I think the best automakers are worth a closer look -- and all things considered, Ford may be the pick of the bunch for reasons that go well beyond its fat (and sustainable) 5.4% dividend yield.
Not all of today's big automakers will successfully make the transition to a future of electric cars with self-driving capabilities. But Ford is among the leaders in developing those technologies: CEO Mark Fields has the company hard at work on a slew of new electric vehicles and plug-in hybrids, including a dedicated self-driving vehicle for fleet use (think ride-sharing) that will go into production in about four years.
Those projects are part of a comprehensive plan to reposition Ford as both a maker of vehicles and a provider of a full suite of mobility services. Ford's recent investments include everything from urban bike-sharing to a crowdsourced shuttle-bus service, both of which will eventually be part of a suite of mobility services available via a single Ford-branded smartphone app. In time, those mobility businesses should give Ford's bottom line a substantial boost from recent levels.
Those recent levels have been pretty good, though. Ford's investments in the future are being funded by a solidly profitable business in the here and now. Thanks to its popular and highly profitable trucks, SUVs, and performance cars, Ford is generating very strong profits: $10.4 billion before taxes in 2016.
Ford says its profit will dip a bit (to about $9 billion) in 2017 thanks in part to those future-tech investments. That news put a bit of a damper on the stock price: Right now, Ford's shares are trading at just 6.5 times its expected 2017 earnings. That gives us an opportunity. Take a closer look at this one.