Investors looking for high-yield dividend stocks need to tread with care. Usually, the very reason a stock has a big payout is that investors are wary of the company's prospects. If they were confident in the company's future, shares would appreciate, and the yield would fall.
But that doesn't mean there aren't any good high-yield dividend stocks out there this month. Every now and again, you come upon a big dividend that's sustainable and even has the chance to grow.
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Today, three of our Foolish analysts tell you why HCP (HCP 0.12%), Enviva Partners (EVA +0.00%), and Retail Opportunity Investments Corp. (ROIC +0.00%) -- all stocks yielding over 4% -- are worth looking into this month. And all three have put their money where their mouths are by holding a stake in their respective picks.
This stock pays a 5.5% dividend and is on sale
Matt Frankel (HCP): Healthcare real estate investment trust HCP, Inc. owns about 800 properties, most of which are senior housing, medical offices, and life-science facilities. The stock yields 5.5% and thanks to analyst downgrades and general weakness in the senior housing industry, it has fallen by nearly 20% since June.
To be fair, there are some short-term concerns. There are legitimate oversupply worries in the senior housing industry, which makes up nearly half of HCP's revenue. The company also has planned asset sales as part of its restructuring efforts that could reduce its funds from operations (the REIT version of "earnings") in the near term.
However, the weakness is likely to be temporary, as HCP has done an excellent job of transforming its portfolio into a high-quality collection of healthcare assets backed by a solid balance sheet.
In addition, the senior citizen population in the U.S. is projected to roughly double over the next 40 years, creating a long, steady period of growth in the senior housing industry, and in healthcare in general.
To sum up, HCP is an excellent way to invest in the growing healthcare industry over the coming decades, and the stock could generate decades of growing income and market-beating returns.
Shopping for a solid dividend
Steve Symington (Retail Opportunity Investments): Our world is in the middle of what seems to be an inevitable shift toward e-commerce, but Retail Opportunity Investments doesn't need online shoppers to thrive in the coming years. Under the leadership of CEO Stuart Tanz -- who astutely guided Pan Pacific Retail from its $146 million IPO in 1997 to its $4.1 billion acquisition by Kimco Realty (KIM 0.67%) in 2006 -- this REIT specializes in buying and revitalizing necessity-based retail properties in mid- to high-income areas. That usually means its properties are anchored by large grocery chains to ensure steady foot traffic and attract other high-quality tenants.
The proof is in the pudding: Last quarter, Retail Opportunity Investments extended its more than three-year streak of maintaining a portfolio lease rate of at least 97%, even as it increased same-space comparable base rent by 15.1% and 12% on new and renewed leases, respectively.
Of course, some investors are worried for the potential disruption of the grocery industry as we know it, especially given Amazon.com's recent acquisition of Whole Foods. I think it's telling, however, that the king of online retail would make such a big bet on a brick-and-mortar business, and I view it as a positive indicator for Retail Opportunity Investments' long-term sustainability.
After falling around 10% on the heels of Amazon's move, shares of Retail Opportunity investments now trade at a reasonable 16.8 times this year's expected funds from operations. For investors willing to buy now and reinvest its healthy 4% dividend, Retail Opportunity Investments should be poised to handily beat the market.
Wood pellets: the gap fuel that's powering Northern Europe
Brian Stoffel (Enviva Partners): Power companies in Northern Europe have a mandate to get off coal and into renewable energy. There's wide consensus that solar, wind, and water will be the main sources of generation in the future. Right now, however, those technologies aren't developed enough to quit coal cold-turkey. Instead, many of these companies have been turning to an unlikely input: wood pellets.
A limited partnership run in the American Southeast, Enviva Partners is all too happy to provide those pellets. Enviva has a business model that's spitting off cash right now. It enters into long-term take-or-pay contracts that lock in customers and then works to improve efficiency over the length of those contracts to squeeze out distributable cash flow -- what dividends are paid out of. Currently, the average contract length is 9.8 years.
Those efficiency-boosting investments include ownership of pellet plants from Virginia to Alabama, and complete ownership of two deepwater ports in Chesapeake, Va., and Wilmington, N.C. In the most recent quarter, those attempts at efficiency took a back seat to investments and costly improvements at the company's processing plants.
Ultimately, these improvements will help provide the types of pellets the energy companies need. But the extra cash spent meant that after paying the dividend, the company had nothing else left over in the form of distributable cash flow. That shouldn't be a long-term concern. With the company on track to deliver $2.36 in dividends this year -- and likely more next year -- this 7.8% has a favorable risk/reward profile.
