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Time to Get Greedy With These 2 High-Yield Dividend Stocks

By Reuben Gregg Brewer - Feb 23, 2018 at 2:52PM

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The market is punishing the shares of Southern Company and Tanger, and you might want to take advantage of the opportunity.

Benjamin Graham, considered the father of fundamental investing, called Wall Street a voting machine, not a weighing machine. It's a view that his protege Warren Buffett has continued to espouse. What these famous investors are explaining is that the market often reacts in dramatic fashion to short-term events that don't really change the long-term future of a company. Right now, giant U.S. utility Southern Company (SO 0.91%) and real estate investment trust (REIT) Tanger Factory Outlet Centers (SKT -0.91%) look like they are on Wall Street's sale rack because of short-term events.

Still growing despite the headwind

Southern is one of the largest utilities in the United States, operating electric and natural gas assets in 19 states. Its largest business is owning and operating regulated electric power plants and transmission lines, mostly in the South, but it also owns regulated natural gas distribution systems and merchant power plants (like solar farms).   

A woman drawing a risk versus reward graph

Image source: Getty Images.

As a largely regulated utility, Southern has to ask the government for approval before it can raise customer rates. Capital spending to expand and improve its utility systems is one of the best things that Southern and other utilities can do to get regulatory approval for rate hikes. That includes actions like storm-hardening power lines and building new power plants. It's the latter that has caused problems for Southern recently.

The company's Kemper clean-coal power plant was supposed to be a showcase for technology that would capture carbon dioxide and turn a dirty fuel into a cleaner one. After delays, huge cost overruns, and technology troubles, Kemper will now be fueled with natural gas, not coal. Southern's Vogtle nuclear power plant, meanwhile, has also been hit with delays and cost overruns. Although this project is still moving forward, despite the bankruptcy of contractor Westinghouse, the construction issues at Vogtle have caused friction with regulators, customers, and investors.   

The bad news surrounding these huge investments has been a major headwind to Southern's stock, which currently sports a 5.2% dividend yield, well above equally large peers like Duke Energy and Dominion Energy, which both have yields around 4.5%. There are certainly near-term problems at Southern that neither Duke nor Dominion face, but Southern should be able to work through this difficult period given enough time. In fact, as recently as the second quarter of 2017, management was still calling for roughly 5% earnings and dividend growth over the next few years despite the ongoing headwinds.   

D Dividend Yield (TTM) Chart

D Dividend Yield (TTM) data by YCharts.

Even if that number slips, it's likely to be a short-term issue, not a long-term one. The core of the business is backed by a collection of stable regulated assets, something that has allowed Southern to maintain or increase its dividend every year since 1948. It's unlikely that the uncertainty surrounding these two projects will derail that streak. You can collect that higher yield while you wait for the near-term troubles to dissipate at an otherwise pretty stable company.   

This is not the end of retail

Another interesting opportunity today is the so-called retail apocalypse, in which the internet is supposed to destroy the physical retail world as we know it. Although there is a clear transition taking place in the retail sector, the word "apocalypse" is likely to prove more hyperbole than fact. While running out and buying a struggling retailer assuming it will recover is probably a bad idea, acquiring a well-positioned mall owner like Tanger is -- in my opinion -- more likely to work out well.

For starters, Tanger operates factory outlets that don't have the exposure to the struggling anchor tenants that are hurting regular malls. Moreover, the discount sector of retail is actually doing relatively well right now, which is roughly similar to the retail niche on which Tanger is focused. As the company likes to say to highlight its through-the-cycle appeal, "In good times people love a bargain, and in tough times people need a bargain."

Tanger's portfolio contains just 44 malls in the United States and Canada. That provides the ability to really focus on every asset to get the tenant mix right.   

The next couple of years could be a little difficult, considering that rent growth started to slow in the third quarter of 2017 and that the REIT has no major expansion projects on the drawing board right now. However, that doesn't mean Tanger won't grow. It completed two mall projects in 2017 that will add to 2018 results, and it has a number of joint ventures that it could take in-house. In the meantime, occupancy remains in the high 90% range, and the company's funds-from-operations payout ratio is reasonable.   

SKT Dividend Yield (TTM) Chart

SKT Dividend Yield (TTM) data by YCharts.

Essentially, the REIT's 6% yield seems likely to keep growing, just like it has every year for 24 consecutive years (2018 is set to be number 25, which would put Tanger in the elite Dividend Aristocrat league). That yield, meanwhile, is the highest it has been since the deep 2007 to 2009 recession. Retail is constantly evolving, and times are certainly tough now, but it looks like investors are throwing the baby out with the bathwater by selling off Tanger shares so steeply.

Risk versus uncertainty

Normally we think about risk versus reward, but there's also a distinction between risk and uncertainty. The risk at Southern is that we stop using electricity and natural gas to power our homes, an unlikely outcome in the near term. Southern should have plenty of time to deal with the uncertainty of two troubled construction projects. You can collect its relatively high yield while you wait for management to fix the problem.

Tanger's risk is that people completely stop going to discount outlets, another unlikely long-term outcome. The near-term uncertainty is that Tanger has to deal with a shifting retail landscape, something it's managed to do quite capably before in its over 20-year public existence. That doesn't mean the process will be smooth, but you can collect a fat yield while others are scared that the internet will turn the world's population into recluses who exclusively shop online.

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Stocks Mentioned

Tanger Factory Outlet Centers, Inc. Stock Quote
Tanger Factory Outlet Centers, Inc.
$14.22 (-0.91%) $0.13
The Southern Company Stock Quote
The Southern Company
$71.31 (0.91%) $0.64

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