Interest rates are starting to creep up, but it will be years before they return to historical levels. And while that's been awesome for consumers and businesses looking to borrow, it's made it much harder for yield-seeking investors to find steady income.
But that doesn't mean there aren't any high-yielding investments worth taking a closer look at. Case in point: Our contributors think 8Point3 Energy Partners LP (CAFD +0.00%), Brookfield Infrastructure Partners L.P. (BIP +0.17%), and Enterprise Products Partners L.P. (EPD +0.29%) are high-yield dividend stocks worth taking a close look at right now.
Image source: Getty Images.
Chasing yield can end badly if you make the wrong investments. Keep reading to learn why we think these three stocks -- even with their higher-than-average yields -- might be ideal for your portfolio.
A very high yield with a compelling risk-reward profile
Jason Hall (8Point3 Energy Partners): Generally speaking, investors should be very cautious when a stock yields more than 7% -- particularly in the current low-interest-rate environment. Frankly, it's almost always a case of the market having already sold out of a company that can't afford its dividend.
But that's not the case with 8Point3, which actually just increased its payout by 3% and has decades of rock-solid contracted revenues on its solar assets. So why is the market undervaluing 8Point3 to the point where its payout is so high? Two reasons.
Image source: 8Point3 Energy Partners.
First, in general terms, it seems the market views 8Point3 and its peers as not having much long-term potential beyond the stream of contracts on their assets. However, as my colleague Travis Hoium recently wrote, that's probably a short-sighted way to value these businesses and their assets for the long term. And that makes 8Point3 potentially undervalued.
Second -- and this is where there is some risk -- is that 8Point3 sponsor First Solar is bandying around the idea of selling its stake in the partnership. The challenge is that the other sponsor, SunPower, is not in a position to buy out First Solar's stake, creating some uncertainty around 8Point3's future prospects, as well as who will acquire First Solar's stake -- and, very importantly, at what price.
In summary, the uncertainty around First Solar's next move creates some risk, but probably at minimal downside to the current share price. To me, that's a risk worth taking, with the upside of capturing a 7%-plus yield with the cash flows to back it up.
A delectable combination of high yield and a growing dividend
Neha Chamaria (Brookfield Infrastructure Partners): When it comes to dividends, I'm a fan of diversified companies. Diversification helps companies mitigate earnings volatility, which can go a long way toward helping them maintain stable dividends. My pick for today, Brookfield Infrastructure Partners, is not only diversified but is also largely recession-proof. That's a nearly perfect combination for dividend lovers.
Brookfield Infrastructure Partners owns and operates infrastructure assets, including but not limited to power transmission lines, freight rail networks, toll roads, ports, gas pipelines, and cellular towers. As most of these are essential services, it isn't surprising that the company has been able to grow its funds from operations (FFO) steadily over the years. Real estate companies commonly use FFO to measure their cash flows, mainly to eliminate the distorting accounting effect of expenses such as depreciation.
BIP Dividend Per Share (TTM) data by YCharts
Brookfield Infrastructure Partners' dividends have grown in line with its FFO, with the stock currently yielding a hefty 4.2%. Last month, the company delivered a strong set of first-quarter numbers, with its 12% year-over-year FFO growth buoyed by acquisitions. With several new investments in its corner, eyes firmly set on growth in high-potential countries such as India, and management already committing to annual dividend growth of 5%-9% in the long run, there's a great chance that income investors who add Brookfield Infrastructure Partners to their portfolio today will be reaping rich returns in the future.
Collecting lots of tolls
Reuben Gregg Brewer (Enterprise Products Partners L.P.): Enterprise Products Partners hails from the energy industry, but it doesn't drill for oil or natural gas. It helps move the fuels, and the products they get turned into, around the country and world. For the most part it's a fee-based business that depends more on demand for oil and gas than on the price of these often volatile commodities. That helps explain why Enterprise has been able to increase its distribution for 51 consecutive quarters -- including right through the deep oil downturn that started in mid-2014.
Image source: Getty Images.
The best part, however, is that Enterprise offers unitholders a roughly 6.2% distribution yield that it was able to cover 1.3 times over in the first quarter. Add to that ample distribution coverage the company's roughly $8.5 billion in growth projects currently being built, and more distribution increases look like a lock. So a high yield and distribution growth -- nice!
That said, don't expect huge growth. Enterprise is already one of the nation's largest midstream partnerships. The law of large numbers means that expansion from here will likely be slow and steady, not fast and furious. So the first quarter's year-over-year distribution boost of roughly 5% is probably a good run rate to expect. But with a yield that's already around three times as large as the yield offered by the S&P 500, that's not such a bad thing.
