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Here's the High-Yield Dividend Stock I'd Buy Right Now

By Joe Tenebruso – Jul 15, 2019 at 5:10PM

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This misunderstood business is offering investors a hefty 7.4% yield -- and the potential for further dividend increases in the years ahead.

Dividend stocks can be a great source of passive income. Not only do they deliver cash into your brokerage account on a recurring basis, but they can also grow this income stream over time.

Read on to learn about one company with a particularly generous cash payout that's set to grow even larger in the coming years.

Dice, labeled with letters that spell the word yield, on top of rising stacks of gold coins

Image source: Getty Images.

Cedar Fair (FUN 1.11%) does one thing extremely well: turn amusement-park fun into cash for investors.

In 2018, 25.9 million people visited the company's parks and resorts. In turn, Cedar Fair generated $1.35 billion in revenue and $468 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).  

As a master limited partnership, Cedar Fair is designed to pass its profits on to investors in a tax-advantaged manner. The MLP paid cash distributions of $203 million to its unitholders last year, and its units currently yield a hefty 7.4%.

Better still, Cedar Fair's cash payout should continue to grow larger over time. The partnership is investing in new rides and entertainment offerings, which tends to drive attendance higher. It's also developing land adjacent to its parks, which is helping to expand its out-of-park revenue. In addition, Cedar Fair recently acquired two award-winning water parks to further strengthen its portfolio of assets and cash-generating ability. Together, management expects these investments to fuel 4% annual growth in Cedar Fair's cash distribution to investors. 

Why is Cedar Fair's yield so high?

Experienced dividend investors know that a high yield can often be a red flag. Sometimes it's a signal that the market believes the dividend could be unsustainable and that the company will be soon be forced to reduce its payout.

My colleague Luis Sanchez recently conducted an analysis of Cedar Fair's dividend. Luis highlighted some legitimate concerns, including that Cedar Fair's dividend payments have exceeded its free cash flow in the past two years. Normally, this should give investors pause. But in this case, I'd note that Cedar Fair's results were hampered by severe weather in 2017 and 2018, which weighed on its profitability.

Moreover, while Luis correctly notes that Cedar Fair's financial leverage has increased in recent years, I'd argue that this was largely due to the company's growth investments, rather than a need to fund its dividend with debt. That might seem like semantics, but I believe it gives a more complete depiction of Cedar Fair's long-term financial position.

So while Luis argues that Cedar Fair's current dividend doesn't appear to be sustainable based on its cash flow, I believe it is. That's because Cedar Fair's earnings and cash flow are set to increase significantly in the coming years.

Management expects Cedar Fair's adjusted EBITDA to grow to $575 million by 2023, up from $468 million in 2018. If the growth in the company's free cash flow roughly approximates this projected growth in adjusted EBITDA, then Cedar Fair's free cash flow could rise by approximately $100 million during this time. That should put its annual free cash flow production at roughly $260 million by 2023, which should be more than enough to cover Cedar Fair's dividend payments, even assuming 4% annual growth from today's levels. 

As such -- and with Cedar Fair's units currently trading for less than 15 times forward earnings -- now seems like a great time to buy this high-yield MLP.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Cedar Fair. The Motley Fool has a disclosure policy.

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