Owning companies with durable businesses that pay high dividends can be a great way for investors to make money in the market long term. And sometimes there are great values among high-yield dividend stocks.
We asked three of our investors for high-yield stocks they think are on sale, and Verizon (VZ +0.02%), Tanger Factory Outlet Centers (SKT +1.23%), Enterprise Products Partners (EPD +0.37%) were at the top of the list.
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Can you hear me now?
Travis Hoium (Verizon): The telecommunications industry may be entering a new phase of growth with 5G networks starting to roll out across the country. And Verizon is leading the charge into the next generation of networks that will enable self-driving vehicles, virtual or augmented reality, and other new technologies. That opportunity for growth is why I think a stock trading at 16 times trailing earnings with a 4.8% dividend yield is on sale for investors.
When a stock reaches a high dividend yield or a relatively low P/E ratio, it usually means a business' future is getting dimmer for some reason. Maybe it has fewer growth opportunities ahead or could be disrupted by new technologies or business innovations. And with T-Mobile and Sprint aggressively pursuing customers, I think the market is seeing some weakness in Verizon, but the company's massive network and the next generation of connected devices will drive a new phase of growth.
Short term, I think the market is making too much of competition from smaller rivals and overlooking the massive network advantage Verizon has over the competition. That will become extremely important as 5G rolls out and Verizon is in prime position to profit. For investors, the deal they're getting on the stock with a 4.8% dividend yield won't last long if 5G is as fast as expected.
Guilty by association
Brian Feroldi (Tanger Factory Outlet Centers): Given the recent turmoil in the retail industry, it is understandable why the market has soured on shares of Tanger Factory Outlet Centers right now. Down 32% since the start of the year, it is clear that Wall Street believes that this company is in trouble. However, I think that this real estate investment trust's business model will still be able to thrive in the changing retail environment. That mismatch is providing savvy investors with a great chance to get in.
Tanger is a REIT that operates 44 outlet shopping centers in the U.S. The company pioneered the outlet center concept in an effort to connect price-sensitive consumers with brand-name manufacturers looking for a way to unload unwanted inventory.
What kind of brand-name companies are we talking about? Currently, Tangers' top five tenants are Gap, Ascena Retail Group (Ann Taylor, Dress Barn), Nike, Philips Van Heusen, and Ralph Lauren. Importantly, the company has no exposure to department stores, which is good since that's the group that's really struggling to adapt to the e-commerce threat. By staying focused on credit-worthy tenants and avoiding department stores, Tanger has been able to keep its occupancy rates above 95% for 24 straight years. It has also produced 55 consecutive quarters of same-center net operating income growth. These numbers clearly show that the company's business model thrives in nearly all economic environments.
Looking ahead, I'm confident that outlet stores will remain popular middle ground for bargain-hunting consumers and brand-name companies alike for years to come. With a dividend yield of 5.7% that should consume about 56% of forecasted AFFO for the year, Tanger looks like a high-yield stock that is worthy of your attention.
Cheap by Enterprise's standards
Tyler Crowe (Enterprise Products Partners): I'll admit that a company's stock trading at an enterprise value-to-EBITDA ratio of 14.4 doesn't exactly scream bargain stock. For natural gas pipeline company Enterprise Product Partners, though, that is looking like a great price for a stock that has a distribution yield of 6.7%.
One of the reasons that Enterprise continuously trades at a premium valuation is that the company is an incredibly reliable business that has raised its payout to investors every quarter for 52 quarters in a row. The company's pipeline, storage, processing, and petrochemical manufacturing business is built to act like a toll road in that it charges a fee for its services, which insulates it from the ups and downs of commodity prices. According to the most recent investor presentation, more than 85% of its gross profits come from these fixed-fee contracts. Also, with a natural gas liquid logistics network that's connected to every ethylene manufacturing facility in the U.S., 90% of the oil refining capacity east of the Rockies, much of the petrochemical manufacturing facilities in the Gulf Coast, and several export terminals, Enterprise gives its customers an immense number of options to send products to the most profitable outlet at any given moment.
EPD Dividend data by YCharts.
On top of Enterprise's great business model, it has a top-notch management team that prudently invests in high-return projects that enhance that logistics network while maintaining a manageable balance sheet and an investment-grade credit rating. All of these elements are what have allowed management to keep raising its payout and why the market consistently assigns a premium valuation to its stock. At today's price, it's an incredibly attractive offer.
