AT&T's (NYSE:T) massive moat, its high forward yield of 6.2%, and its status as a Dividend Aristocrat make it a favorite income investment for many investors. It might seem tough to find a stable company that pays a higher yield than AT&T, but three stocks fit that description: GEO Group (NYSE:GEO), Brookfield Renewable Energy Partners (NYSE:BEP), and CenturyLink (NYSE:CTL).
A highly controversial high-yielder
Leo Sun (GEO Group): GEO Group is the largest publicly traded for-profit prison company in America. Its only meaningful competitor is CoreCivic (NYSE:CXW), formerly known as Corrections Corporation of America. Both companies emerged in the 1980s as the Reagan-era "War on Drugs" caused overcrowding at government-owned facilities.
Many investors intentionally avoid GEO Group due to moral objections, and the U.S. Department of Justice intends to gradually reduce its dependence on prison companies. Many democrats also want state governments to stop using GEO and CoreCivic's facilities altogether. The legalization of marijuana could also greatly reduce the number of drug-related incarcerations.
Despite those headwinds, GEO's core business is still growing -- analysts expect its revenue to rise 3% this year as its earnings climb 5%. Its stock trades at just 17 times forward earnings.
GEO pays a whopping forward dividend yield of 7.3%, and it's raised that dividend annually for five straight years. It spent 72% of its free cash flow on that dividend over the past 12 months. CoreCivic, which pays a 6.7% forward yield, spent 78% of its FCF on its dividend during the same period.
Looking ahead, GEO could address the uncertain future of its core prison business with the construction of new ICE processing centers -- which benefit from the Trump Administration's tougher stance on illegal immigration. It also consistently repurchases shares ($70 million in the first half of the year) to tighten up its valuations.
A high-yield bet on renewable energy
Nicholas Rossolillo (Brookfield Renewable Energy Partners): It hasn't been the best of years for renewable energy provider Brookfield Energy Partners; shares are down 13% so far in 2018 as of this writing. However, for investors looking to scoop up a high-quality dividend-paying company, the share price decline means Brookfield Energy's stock just edges out AT&T with a 6.4% dividend yield.
Besides that juicy payout, there are other reasons to consider Brookfield as a part of an income-generating portfolio. The company is a leader in renewable power, operating 876 facilities in the Americas, Europe, and Asia. Three-quarters of those facilities are hydroelectric, with wind, solar, and power storage properties making up the balance.
Brookfield has a stated goal of increasing its distributions 5% to 9% every year, and providing a targeted annual total return (distribution plus share price appreciation) of 12% to 15%. Over the last trailing-five-year period, the investment company hasn't quite delivered, with a total return of 54% (with quarterly distributions reinvested), but that still isn't too shabby of a record. Over that same time frame, revenue is up 70% and funds from operations are up 46%.
Part of the five-year underperformance relative to the company's stated goal is the year-to-date share-price performance. Brookfield has been using capital and profits to reinvest into new projects, which has put a near-term dent in revenues and bottom line. It's part of the game when buying shares of an investment limited partnership, but management thinks its spending will pay off soon. It's also worth noting that, as a limited partnership, investors will receive a K-1 form by the end of every March that will need to be reported on tax returns. The distribution will be part dividend and part return of capital, which makes Brookfield's tax treatment a little different from a garden-variety stock. Ask a tax pro for help.
However, if you believe renewable energy has a future, Brookfield Energy Partners is worth a look. With an over 6% yield on shares due to headwinds thus far in 2018, now could be a good time to add it to portfolios.
Yes, CenturyLink can pay its dividend
Jamal Carnette, CFA (CenturyLink): With an outsized dividend approaching nearly 10%, CenturyLink would be able to outperform the long-term stock market average with no capital appreciation, simply by paying its dividend. The question for investors is, could CenturyLink pay its dividend? Increasingly, it appears the answer is yes.
CenturyLink's "unsustainable dividend" narrative is based on lazy analysis using the flawed dividend payout ratio, a metric that divides dividends by net income. While CenturyLink's payout ratio has been above 100%, companies pay dividends out of cash flow, not net income -- these two figures can differ through non-cash expenses like depreciation and amortization. In the case of CenturyLink, this figure is significant, and its dividend looks more secure when compared to cash flow.
In June, I noted the market was too bearish on CenturyLink, and since then, shares are up more than 20% on strong earnings and an increase in full-year cash flow guidance. I'm not saying this isn't a higher-risk stock -- the company experienced top-line contraction and is trying to transition away from a shrinking legacy business via acquisition -- but the market remains too bearish on the company.
Jamal Carnette, CFA, owns shares of AT&T and CenturyLink. Leo Sun owns shares of AT&T. Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.