With investors fleeing risk as the pandemic spreads and interest rates plummet, you'd think that investors in stocks that pay a dependable stream of dividends would be relatively happy right now. Or at least, maybe they'd be less sad than growth investors at the moment.
But it isn't so. Dividend stocks have actually underperformed growth stocks this year. The Vanguard Growth ETF is down 1.3% for the year, but the Vanguard Dividend Appreciation ETF is down 8.5% and the Vanguard High Dividend Yield ETF is off a whopping 16.3% since we ushered in the new decade. It's not a lot of fun when the stocks you own for steady income drop in value by more than four years' worth of payouts.
Part of the reason is that the energy sector has taken a pounding and retail stocks aren't doing so well, either. And lately, growth stock investors seem to be willing to look past the huge impact of the pandemic on the economy and are scrambling to put money into the survivors -- perhaps a bit too sanguine about the realities of the recovery ahead.
Whatever the cause, there are dividend stocks paying yields over 5% now that have more-than-enough cash flow to cover payouts. Triton International (TRTN 0.67%), Kinder Morgan (KMI 1.87%), and STORE Capital (STOR 0.39%) have share prices that are depressed due to valid but temporary concerns, pay a yield of 5%, and have the potential to grow dividends when the economy improves.
Triton International hasn't had things going its way the last year or two. The company is the world's largest lessor of intermodal freight containers, so it does well when international trade does well and the economy is booming. First we had a trade war with China; then we had a near-total shutdown in Chinese manufacturing from late January through February due to COVID-19. Now we face a global business slowdown.
But Triton navigated the choppy waters of the trade war well, adjusting the size of its container fleet down to match softening demand. The company was able to grow adjusted net income 1.1% in the challenging year of 2019 and generate strong cash flow that allowed it to maintain its dividend and buy back a hefty 8.8% of its outstanding shares.
The impact of the pandemic on global trade hit Triton early in Q1. Factory shutdowns in China in January and February reduced trade volumes, and the company's first-quarter adjusted earnings per share (EPS) fell 22% to $0.93. Utilization of its containers are falling but are still a reasonable 95.2% as of the middle of April. The company had plenty of cash flow to pay $37 million in dividends and still buy back another $34 million of its stock.
Triton admits there's plenty of uncertainty in the outlook for the rest of the year but commented in the conference call this month that its customers seem to be hanging on to containers in anticipation of needing them for a quick recovery in global trade. That's a good thing for Triton, but even if the recovery is prolonged, the company shouldn't have any trouble paying the dividend. The stock offers a rich yield of 6.5% and sells for book value and nine times recently lowered estimates for 2020 earnings.
Buying an energy stock when oil prices are in turmoil may be the furthest thing from most investors' minds. The shares of Kinder Morgan have been hammered along with the rest of the sector after the collapse of OPEC in early March and lower demand from pandemic-affected economies around the world. But the company is insulated from commodity prices more than other energy companies are, and even raised its dividend last week.
Kinder Morgan operates the largest natural gas transmission network in the U.S. It also operates pipelines that transport gasoline, crude oil, carbon dioxide, and chemicals, making it one of the largest energy infrastructure companies in the country. Because it essentially runs a toll road for energy products, it isn't as exposed to commodity prices as are the companies that actually produce or refine the stuff.
In fact, over 90% of Kinder Morgan's cash flows come from contracts based on fees rather than the value of the products flowing through the pipes. Also, 64% of cash comes from take-or-pay agreements, where the customer is essentially paying a fee to reserve pipeline capacity and will pay whether they use it or not. Another 27% of cash flow comes from contracts where the customer pays for the volume of product that flows through the pipeline, regardless of commodity pricing.
The predictability of the company's cash flows makes it attractive to conservative dividend investors, but the company isn't totally immune to the recent energy price shock. Distributable cash flow (DCF) is the metric investors watch most closely, and Kinder Morgan's declined 8% to $0.55 per share in the first quarter, compared with Q1 of last year.
That DCF is more than enough to meet the company's capital needs and pay the $0.25 dividend, but the company decided to be cautious and delay a planned 25% boost to the payout to $1.25 annually. Instead, Kinder Morgan raised the dividend 5% to an annual rate of $1.05, and said it remained committed to boosting it to $1.25 later, perhaps as early as January 2021.
A 5% dividend boost is certainly better than investors are seeing from most other companies in this uncertain time, and raises the stock's yield to 6.7%. The shares are selling for 19 times the consensus analyst estimate for 2020 earnings.
A stock tied to retail may raise the eyebrows of some conservative investors, but this could be an excellent time to take a position in the only real estate investment trust (REIT) in Warren Buffett's portfolio.
"STORE" is an acronym that describes the company's business, standing for "single tenant operational real estate." STORE acquires and leases buildings to tenants in the retail and services industries. Unfortunately, the company focuses on middle-market tenants in businesses that have been particularly hard-hit by pandemic shutdowns, such as movie theaters, restaurants, health clubs, and early childhood education centers. The company's tenants are having a few terrible months, almost across the board.
Fortunately for STORE investors, though, the company is characterized by a very conservative approach to writing contracts. It leases on a triple net basis, taking some of the risk off of STORE and its shareholders, and is extremely diligent about the kind of tenants it takes on. Tenants are required to have thriving and profitable businesses -- at least in normal times -- and STORE's contracts tend to be senior to other tenant-payment obligations. The company's portfolio of properties is highly diversified, with 500 tenants in 112 industries in 49 states.
STORE also came into the crisis with a high level of liquidity. It ended 2019 with $100 million in cash and an unused $600 million on its line of credit and raised $150 million in January by issuing new shares of stock at $36 per share. This was a lucky move, considering the stock is below $20 now. The company's total expenses for the full year of 2019 were $464 million, so it should be prepared to ride out a long period of rent-collection problems.
STORE Capital reports earnings on May 5, and it could be ugly. But that won't necessarily mean the stock will fall or stay down for too long. The shares have already been pummeled this year and sell for half their 52-week high. There's a good chance of a dividend cut or suspension, but the market is already anticipating that outcome with the stock yielding 7.8%.
If you believe the economy will eventually recover from the pandemic, retail REITs are bargains at the moment, and STORE Capital is probably the safest bet in the industry.