Often a high dividend yield is an indication of a stock that's facing some sort of trouble -- but not always. If you take the time, you can find high-yield stocks worth buying. For example, decidedly low-tech Lamar Advertising Company (LAMR 0.34%), beaten-up midstream player Magellan Midstream Partners, LP (MMP 1.77%), and renewable power-focused TerraForm Power, Inc. (TERP) come from vastly different industries. However, each of these high-yield stocks has a solid business and good growth prospects.
Not all advertising is going online
Chuck Saletta (Lamar Advertising): A key premise of advertising is that you want to reach people where they are, when they're there. These days, many advertisers are going online to reach people on the internet or their mobile phones as entertainment shifts to digital forms. Still, the one place where the digital world isn't likely to replace existing forms of advertising is the open road. That's where Lamar Advertising, a real estate investment trust (REIT) that specializes in billboard advertisements, shines.
As a REIT, Lamar Advertising is required to pay out at least 90% of its income as a dividend. That assures that as long as it remains profitable, it will pay a dividend and will likely have a fairly high yield. Its current yield is around 5.7%, and it recently increased its quarterly dividend by around 9.6% to $0.91 a share. Its dividend is generally well covered by its operating cash flows, giving investors reason to believe those dividends can continue.
Analysts expect Lamar Advertising to be able to continue to grow its earnings by around 3% annualized over the next five or so years. While that's not exactly the fastest anticipated growth around, it should be enough to keep up with the currently expected inflation rate. Combine that modest growth with its hefty yield, and investors buying today have the potential for a decent total return over time.
Down, but not out
Reuben Gregg Brewer (Magellan Midstream Partners LP): The midstream oil and gas sector isn't feeling the love from investors today, with the Alerian MLP Index down roughly 45% from its 2014 highs. The pain hasn't been quite that bad at Magellan, which is down just 20% from its 2014 peak.
Some midstream players have gotten themselves into trouble (often leading to distribution cuts) by taking on too much debt in a quest for growth. But the negative industry sentiment pushing Magellan's shares lower really doesn't have much to do with the partnership's performance. In fact, Magellan's business has held up quite well, allowing it to raise its distribution every single quarter since it came public in 2001 -- notably including every quarter since the 2014 pricing peak for the sector. As for leverage, Magellan's debt-to-EBITDA ratio sits near the bottom of the industry. It remains as conservatively run today as it has been throughout its history.
The future looks fairly bright, as well. Magellan has plans to spend $1.4 billion on growth projects in 2018 and 2019. The projects have customers already lined up or are at facilities where demand shows a need for expansion. This spending is expected to lead to distribution growth of 8% this year and between 5% and 8% in 2019 and 2020. Distribution coverage, meanwhile, is projected to remain a robust 1.2 times. With a high 5.7% yield, Magellan is still worth buying, even if the broader midstream space is struggling today.
A dividend powered by the wind and sun
Travis Hoium (TerraForm Power): Renewable energy is the fastest-growing form of new energy worldwide, and yieldcos like TerraForm Power play a key role in making wind and solar developments possible. The company buys projects from developers, financing them with cash on the balance sheet or by issuing a combination of debt and equity. As assets are accumulated, they add to the cash available for distribution, which funds the dividend's ongoing payment as well as long-term growth.
TerraForm Power currently has 2,606 megawatts (MW) of projects on its balance sheet with an average of 14 years left on their contracts to sell electricity to customers, ensuring a long-term stream of cash. It also has the benefit of having the backing of Brookfield Asset Management, which is the company's controlling shareholder and ensures the yieldco can grow its asset base and dividend in the long term. Brookfield acts like a backstop when acquiring projects, making sure the cost of debt or equity isn't too high, assuring that any acquisition will help grow the dividend. It already did that with the proposed acquisition of Saeta Yield, where Brookfield fully backstopped the $400 million equity offering.
All of the wind and solar projects generating cash flow each year ultimately pay dividends, and the payout currently stands at $0.19 per share quarterly, or a yield of 6.8% annually. Given the growth and high predictability of wind and solar energy projects, plus the backing of a financing power like Brookfield Asset Management, I think TerraForm Power is a great high-yield dividend in the energy market, and it can ride the industry's growth for years to come.