Rules are meant to be broken, which is why the admonishment to not chase yield, though usually correct, doesn't necessarily apply when it comes to United Microelectronics (UMC 1.10%), Royal Dutch Shell (RDS.A) (RDS.B), and Cedar Fair (FUN -0.75%).
These three stocks offer yields north of 5%, which traditional investing sense says makes them riskier bets. But we asked three Motley Fool contributors to explain why investors would do well to ignore the rule book in these instances.
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These 6.2% yields won't last (for all the best reasons)
Anders Bylund (United Microelectronics): The semiconductor industry is cyclical in nature, and the sector is going through a downturn at the moment. Consumers around the world are buying fewer electronic devices, inventories are piling up throughout the supply chain, and chip manufacturing specialists like United Micro just aren't getting a ton of new orders. Market makers were quick to punish United Micro's stock as these trends played out in 2018, sending share prices 25% lower last year.
What goes down doesn't necessarily have to come back up, but United Micro is most certainly poised to come back swinging from this drastic drop.
The stock is now trading at just 2.5 times free cash flows. The plunging share prices also pushed dividend yields higher, stopping at 6.2% today.
We're looking at a fantastic cash machine here. Even in a weak market, United Micro converted 16% of its trailing revenues into $800 million of free cash flows. Only 34% of that incoming cash was used to fund the dividend checks, leaving plenty of room for further payout boosts.
And the market will indeed turn back up. If anything, we're looking at an artificial lull right now -- smartphone sales are lagging at least partly due to users holding on to their existing 4G phones until the faster and more reliable 5G standards start to show up on actual store shelves. The Chino-American trade wars aren't helping but also won't last forever. Remove these temporary roadblocks and watch the global demand for semiconductors bounce back in a hurry. Invest in United Microelectronics now if you want to lock in its juicy dividend yield at insanely low share prices.
These numbers aren't lying
John Bromels (Royal Dutch Shell): You can't deny that among oil and gas companies, Royal Dutch Shell is a top dividend stock. Its current yield of 5.9% is the best in its class and has been for the better part of a year. In fact, you'd have to go all the way back to 2013 to find a time when Shell didn't have the highest or almost-highest yield among the oil majors.
So clearly dividend investors should probably always have one eye on Shell, but right now is an excellent time for everyone else to keep an eye on the company as well. That's because right now, Shell is looking particularly undervalued compared to the rest of the industry. Its P/E ratio of 11.4 is easily the lowest of the integrated oil majors (Total's is 13.7; all the others are above 16), whereas it's historically been on the higher end. By another popular valuation metric, enterprise value to EBITDA, which strips out depreciation expenses, it's likewise the cheapest, with its 5.0 valuation edging out Total's 5.1 for the best spot (lower is better; all the other majors are above 6).
So it's cheap and it has a high yield...but plenty of companies with big problems can say the same. Does Shell have major problems right now? Well, not unless you consider making a ton of money a problem. In the company's most recent quarter, revenue was up 18.7% year over year, earnings were up 48%, and operating cash flow increased an astonishing 202.2%. Much of this was thanks to a big increase in the price of natural gas, an area in which Shell has made big investments in recent years.
A well-run company with a cheap valuation and a monster yield is a trifecta that doesn't come along very often. Now is a great time to consider buying Shell.
Get ready for a thrill ride
Rich Duprey (Cedar Fair): Amusement park operator Cedar Fair was hurt last year by declining attendance at its theme parks due to severe weather during the peak summer months, which lowered profitability. It was able to forestall a complete washout by enjoying a rebound during the fall and winter months, but Cedar Fair's stock trades 20% below where it did a year ago, which has pushed the yield on its dividend to over 7%.
Investors should take a ride on this stock and enjoy the returns from that payout, because as we head back into the months that are Cedar Fair's wheelhouse, the amusement park operator has plans in place to minimize the impacts that variable weather patterns can inflict.
The thrill-ride specialist is pushing advance-season-pass sales that give customers park access all year round while providing Cedar Fair with cash up front without having to worry that any particular storm or month of storms will dramatically affect revenue. Cedar Fair is also building out indoor entertainment venues that can provide thrillseekers fun regardless of what the weather is outdoors.
At 25 times trailing earnings and 15 times next year's estimates, it's a reasonable valuation for a stock expected to grow earnings at 6% annually for the next five years, and investors have the potential to enjoy the thrill of capital appreciation as one of the leading amusement park operators stabilizes its revenue growth.
