High-quality dividend stocks are like a fine wine: Over time, they just get better and better.
The problem is, finding high-quality dividend stocks isn't easy. That's because yield and risk tend to be correlated. In other words, the higher the yield investors will receive, the higher the likelihood of losing money and/or running into a yield trap -- i.e., a situation where an artificially high yield lures investors into a struggling business. Since yield is a function of payout relative to share price, a failing business model with a plunging share price could present with a skyrocketing yield and trick unsuspecting income investors.
That's the bad news when it comes to high-yield dividend stocks. The good news is that not all high-yield stocks are built equally. Some have solid foundations and could be quite the bargain for long-term-oriented investors. Right now, there are three ultra-high-yield dividend stocks that have been beaten down in recent years and may be worth buying.
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Altria Group
To lean on the ultimate cliche, tobacco giant Altria (MO +1.22%) has gone up in smoke recently, with its stock hitting lows not seen in five years.
Altria is being hit on two fronts. First, adult cigarette smoking rates have fallen to an all-time record low, based on recordkeeping that goes back to the mid-1960s. Consumers have become more aware of the adverse health effects of tobacco and are opting to quit, or are choosing alternative nicotine consumption options, such as vaping.
The second factor is that vaping health concerns are beginning to crop up, with six deaths and hundreds of lung illnesses recently linked to those using vape devices. In particular, Altria has a 35% stake in vaping device manufacturer Juul, which has drawn the ire of the U.S. Food and Drug Administration for allegedly deceptive marketing practices.
Then again, Altria has more tricks up its sleeve than most folks realize. To start with, while falling smoking rates aren't ideal for a tobacco company, it's certainly not the end of the world. That's because Altria offers an assortment of well-known premium and discount brands, and it possesses substantial pricing power on these brands. The addictive nature of nicotine has allowed Altria to grow sales and/or its bottom line, because the company understands that its customer base will pay more for cigarettes. Thus, the downfall of tobacco appears to be an exaggeration.
Altria has also sunk $1.8 billion into cannabis stock Cronos Group (CRON +0.37%) for a 45% equity stake in the company. Even with Cronos being potentially hurt by near-term vaping health concerns, this investment nevertheless gives Altria access to other facets of the marijuana industry. For example, Cronos Group has a deal in place with Ginkgo Bioworks to develop eight targeted cannabinoids using Gingko's microorganism platform. These cannabinoids can be produced at commercial scale and could be used in high-margin derivative products. In essence, Altria's investment gives it exposure to high-margin areas of the pot industry.
Altria is also relatively inexpensive. Although sales growth is likely to be in the low single digits in the near term, earnings per share (EPS) growth should outpace sales growth. At just nine times next year's consensus EPS, and now sporting a nearly 8% yield, Altria looks to be ripe for the picking for savvy income investors.
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Mobile TeleSystems
Another ultra-high-yield dividend stock that investors would be wise to consider buying is Russian telecom and content giant Mobile TeleSystems (MBT +0.00%). MTS, as the company is commonly known, is trading near a 15-year low.
The biggest concern for a company like Mobile TeleSystems is growth. For a while, concerns had revolved around instability in Russia's currency, the ruble. But now it's shifted to MTS' already high wireless saturation rate throughout Russia and the neighboring countries that MTS serves. In other words, investors have been left to wonder where future growth will come from, which has weighed heavily on this stock.
However, like Altria Group above, MTS has a number of intriguing sources of growth that the market seems to be overlooking. Within its traditional wireless segment, Mobile TeleSystems should benefit from ongoing network infrastructure upgrades and what I'd suspect will be a strong tech replacement cycle. The rollout of 5G networks in major cities, and the upgrades to 4G and LTE networks in growing but outlying suburbs in Russia, offers an opportunity for MTS to generate consistent growth in higher-margin wireless data. For example, even with high wireless saturation, Mobile TeleSystems still generated OIBDA growth of 9.4% in the second quarter from the prior-year period.
Furthermore, this is a company that's moving beyond just its wireless business. By incorporating MTS Bank into the fold, the company now has a fintech solution to go along with its streaming platform and its nascent, but rapidly growing, MTS cloud offering. According to the company, it saw a 7.6 times year-over-year increase in stored and processed data in its MTS cloud, with a more than doubling in loan issuances via MTS Bank in the first half of 2019.
Though ruble volatility will always remain, intermediate-term growth for Mobile TeleSystems may be stronger than most folks realize. That makes MTS' current 8.7% dividend yield, and its forward price-to-earnings ratio of less than 8, pretty darn attractive.
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Alliance Resource Partners
A third beaten-down ultra-high-yield stock to consider scooping up is coal producer Alliance Resource Partners (ARLP +1.77%). And, yes, I did just say "coal."
As you can imagine, the big reason Alliance Resource Partners is knocking on the door of a three-year low has to do with the outlook for the coal market. Coal prices have been under pressure for years, with a number of Alliance Resource Partners' peers going bankrupt during the course of the decade under the weight of large piles of debt. Investors are clearly worried that renewable sources of energy will continue to pressure the coal market, with coal producers simply fading into the background.
However, Alliance Resource Partners isn't like your typical coal producer. Unlike its peers, this company's management team has been especially prudent with its cash management and acquisition strategy. Alliance Resource has in the neighborhood of $550 million in net debt, which equates to a manageable debt-to-equity ratio of 44%. For context, the company has generated $623 million in operating cash flow just in the past 12 months, demonstrating that its debt situation is hardly a concern.
Alliance Resource Partners also has tricks up its sleeve to reduce the volatility associated with the coal market. It often books volume and pricing agreements up to three years in advance, thereby reducing its reliance on wholesale coal pricing. Additionally, the company has considerably increased its exports of coal over the past three years, ensuring that a renewable energy push in the U.S. won't mean irrelevance for the company.
It should also be noted that Alliance Resource Partners acquired oil and gas assets in the Permian Basin in 2019, which adds a new source of long-term revenue to the company's asset portfolio.
The coal industry may not be the moneymaker it once was, but this income stock looks to be a diamond in the rough. Sporting a greater than 13% dividend, and valued at roughly 10 times next year's EPS, Alliance Resource Partners looks like a steal for income investors.
