High-yield stocks often get a bad rap as being risky bets. While it's true that investors should be wary of stocks with higher payouts, there are some excellent investment options in this space for investors looking for an extra dose of income. The key is to find companies that have rock-solid financials so that they can sustain their above-average payouts.
Three companies that I believe are excellent high-yield options are Enterprise Products Partners (NYSE:EPD), Medical Properties Trust (NYSE:MPW), and Brookfield Renewable Partners (NYSE:BEP). In fact, I believe in these companies so much that I recently added to my position in all three. Here's why I think these are top-notch stocks for income investors.
A pipeline of steady income
Energy infrastructure giant Enterprise Products Partners makes most of its money by charging customers a fee for using capacity on its pipelines and processing plants. Because of that, the company generates stable cash flow that has continued to grow over the years as it adds new assets to its network. For evidence of the remarkable stability of its business model just look at its distribution, which has now increased 51 straight quarters. Meanwhile, that payout is a quite generous 6.3% at the moment.
Enterprise has worked hard to ensure that it can continue to pay a growing distribution. That's why it has invested billions of dollars to build and buy fee-based assets over the past few years that have combined to increased the percentage of its total gross margin coming from fees up to 93% this year, an improvement from 83% in 2013. The company has another $8.4 billion of projects currently under construction that should keep its fee-based cash flows growing. Meanwhile, despite the high yield, Enterprise still only pays out 70% to 80% of its cash flow each year, retaining the rest to help finance growth projects. Finally, the company tops off its sound financial profile with one of the highest credit ratings among master limited partnerships because it has such a conservative leverage ratio. Add it all up and Enterprise Products Partners should have no problem paying a growing distribution for years to come.
A healthy dividend yield
Medical Properties Trust has a similar fee-based business model in that it charges rent to hospital operators that lease its hospital real estate under long-term contracts. Because of that, it generates very predictable cash flow, enabling it to pay a healthy dividend that currently yields 7.2%.
The company has done an excellent job of improving the long-term sustainability of that payout by enhancing its portfolio and financial situation over the past year. One of the catalysts was a decision last year to sell $800 million of lower return assets, which helped it reduce debt so that its leverage ratio was the lowest in the sector. This improving financial flexibility enabled it to pounce on new opportunities in recent months that have grown cash flow 10% while strengthening its dividend payout ratio from 83% to 70% of cash flow. As a result of these transactions, it is healthier than it has ever been, which means it has the financial capacity to continue acquiring hospital real estate. That keeps it on track to maintain steady mid-single-digit dividend growth for years to come, making it a top real estate investment trust to buy for the long term.
A steady stream of cash flow
Sticking with the stable income theme, Brookfield Renewable Partners also produces very consistent cash flow. It does so by selling the electricity generated by its hydro and wind assets under long-term contracts. Overall, the company has secured contracts for 92% of its projected generating capacity, which have an average remaining life of 17 years. One of the outcomes of that cash flow stability is Brookfield Renewable Partners' ability to pay a generous distribution that currently yields 6.2%. Meanwhile, with low leverage at just 38% debt to capitalization and a dividend payout ratio of around 70% of annual cash flow, the company's distribution appears to be very sustainable over the long term.
In fact, Brookfield Renewable Partners anticipates that it can increase the payout by 5% to 9% per year just from organic cash flow growth and project development. That's because its contracts escalate with inflation while the company has several high-return growth projects coming down the pipeline. That visible growth makes Brookfield Renewable a top option for investors looking for an environmentally friendly income stock.
Investors seeking a high yield have three great options in Enterprise Products Partners, Medical Properties Trust, and Brookfield Renewable Partners. What I like most is that these companies not only pay well but they back those dividends with steady cash flow, conservative payout ratios, and healthy balance sheets. Meanwhile, the icing on the cake, in my opinion, is that all three companies have clearly visible growth prospects on the horizon. It's that combination of steady income with upside that drove my recent decision to buy more of all three companies.
Matt DiLallo owns shares of Brookfield Renewable Energy Partners, Enterprise Products Partners, and Medical Properties Trust. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.