If it's dividends you're after, there are plenty of top companies to consider, particularly those on the Dow Jones Industrial Average. But if you're willing to consider stocks off the beaten path that still pay amazing dividends, there's a whole world of often-overlooked winners out there that can reward a dividend investor.
We've asked three of our Foolish investors to choose a dividend stock they think is unknown but still amazing, and they picked Korea Electric Power Corporation (NYSE:KEP), Oaktree Capital Group (NYSE:OAK), and Buckeye Partners (NYSE:BPL). Here's why these could be right for your dividend portfolio.
This Korean company could take gold in the dividends race
Rich Smith (Korea Electric Power Corporation): Thanks to the recent Winter Olympics, a lot of Americans are rediscovering South Korea these days. Personally, I've had a fascination with Korean companies ever since I read Michael Breen's survey of Korean history and industry, The New Koreans, last year.
Korean industry, it turns out, is growing like a weed, and it requires one thing to keep it growing: Power. That's one reason Korea Electric Power Corporation is so attractive to me. It's South Korea's largest electric utility, and so both instrumental to the growth of Korean industry, and also likely to reap the lion's share of the benefits of that growth as large Korean companies buy more and more power to sustain themselves.
True, from an investor's perspective, Korea Electric Power Corporation is a bit tricky to value. The company's earnings are all over the place -- losing money in 2012, earning hardly anything the year after, surging to $11.3 billion in profits in 2015, then quickly receding to just $1.3 billion earned last year.
Still, even those much lower trailing-12-month profits are enough to give Korea Electric a modest price-to-earnings ratio of less than 16. (The average stock on our own S&P 500 costs more than 25 times earnings.) Korea Electric also pays one of the most attractive dividend yields you'll find outside of the REIT or MLP spaces -- 6%, according to data from S&P Global Market Intelligence, which is more than three times as high as the 1.8% average yield on the S&P 500.
While I admit the erratic nature of Korea Electric's earnings gives me pause, the high dividend yield is enticing. This is one dividend stock that might be worth getting to know.
Betting on caution
Tim Green (Oaktree Capital Group): Investors like predictable dividends. Oaktree Capital, an alternative-asset manager co-chaired by Howard Marks, is not that kind of company. Its dividends ebb and flow based on how much cash is available to distribute each quarter. If you can look past the always-changing dividend payment, Oaktree is a great choice, especially with the market as expensive as it is.
Here's the thing: Oaktree is all about exercising caution when caution is warranted. During the latest conference call, CEO Jay Wintrob said this: "In sum, the kind of environment where the benefits of our focus on controlling risk and investing with an ample margin of safety do not become readily apparent. Given these buoyant market conditions, we continued to be a net seller of assets in 2017."
Ramping up risk to keep returns high during raging bull markets isn't in the playbook. That's the right strategy, and it all but guarantees that Oaktree will be able to weather just about any storm. The dividend has been impressive over the past year, with total payments of $3.34 per share. That's good for a trailing yield of 8%, but again, that number will change going forward.
With many asset classes priced for perfection, Oaktree isn't finding many opportunities. When the next downturn hits, though, Oaktree will be ready.
Amazing yield, moderate risk
John Bromels (Buckeye Partners): If you can stomach a little bit of risk with your yield, Houston-based MLP Buckeye Partners should make your mouth water with its current double-digit yield of 11.3%. Of course, a yield that high should immediately make investors wary. It might not be sustainable, or might be the result of a crashing share price.
Sure enough, Buckeye Partners' per-unit price did decline by about 25% in 2017, pushing the yield higher. And the company's distribution coverage -- the amount of cash it has available to pay its distribution -- is pretty slim. In fact, for full-year 2017, its coverage ratio was 1. That means it had just enough cash to cover its distributions with nothing left over. Worse, in Q3 2017, the company's coverage ratio dropped below 1, meaning it was unable to cover its entire distribution with cash from operations.
Don't freak out just yet, though! Buckeye has a 22-year streak of annual distribution increases, and it has never once cut the company's payout. CEO Clark Smith indicated on the most recent earnings call that he certainly isn't planning to do so now, either: "[A] temporary shortfall in coverage will not affect our distribution policy ... Buckeye currently has no intention to cut its distribution."
And even if the yield was trimmed by a percentage point or two, it would still be higher than most dividends around. That's pretty amazing in my book. Just be sure to check out all the tax rules surrounding MLPs before you buy, because they sometimes have more IRS reporting requirements than traditional stock investments.