Dividends have been under intense pressure this year. More than 175 publicly traded companies have either slashed their payout by more than 50% or suspended it all together. That dividend carnage has investors beginning to hate all dividend stocks, even though many payouts will survive this year's downturn.
Three of these hated dividend stocks are MLP Crestwood Equity Partners (CEQP), office REIT Boston Properties (BXP 0.58%), and refining giant Phillips 66 (PSX -3.41%). All three have seen their stock prices crushed, pushing their yields up to enticing levels.
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Confidence in this sky-high payout is on the rise
This year, most investors have abandoned Crestwood Equity Partners due to worries that the oil market downturn will force the company to cut its lucrative dividend. Overall, the MLP's unit price has plunged more than 55% this year, pushing the yield on its distribution to an eye-popping 18%, a clear sign that the market doesn't think it's sustainable.
But Crestwood has increasing confidence that it can maintain its big-time payout, which is why it declared its next payment in mid-July. The company made that move "based on strong forecasted second-quarter results relative to current market conditions," according to comments by CEO Robert Phillips in the press release announcing the latest distribution.
He noted that the company's producing customers didn't shut in as much volume as expected despite lower oil prices during the second quarter. It also captured immediate value from a recently closed acquisition.
Furthermore, Phillips noted that "we continue to have increasing optimism around the second half of 2020 relative to our revised guidance." Because of that, the company expects to generate positive free cash flow after paying out its distribution during the third quarter, putting it in excellent position for this year and beyond.
Thus, it seems like this hated payout will make it through this downturn, making it a compelling income stock for investors who aren't afraid to take on a bit more risk.
It turns out that most people don't want to work from home
Shares of Boston Properties have been cut by about a third this year, pushing its dividend yield up past 4%. The main factor weighing on the leading office property landlord is concern that more companies will allow their employees to work from home permanently. If that happens, office occupancy and rental rates would fall, which would weigh on Boston Properties' results.
But after getting a taste of working from home because of the coronavirus, most employees still prefer heading into the office five times a week. According to a recent study by the Gensler Research Institute, only 12% of U.S. office workers want to work from home, up just slightly from 10% before the pandemic. On top of that, companies have found that having their employees come into a central office is better for collaboration, creativity, mentorship, and productivity, Boston Properties says. Because of those factors, companies will continue to need office space.
Further supporting Boston Properties' dividend is its low payout ratio (roughly 50% of its cash flow) and top-tier balance sheet, which features the highest credit rating among office REITs and about $2 billion in cash. That gives it lots of financial flexibility to make acquisitions during the current downturn, which could drive future dividend growth.
This dividend should survive the coronavirus downturn
Shares of refining giant Phillips 66 have plummeted more than 40% this year, pushing its dividend yield to 5.6%. Like Crestwood, the energy company recently declared its next payment, which bodes well for its long-term sustainability.
The main factor weighing on Phillips 66's valuation this year is plunging gasoline demand because of COVID-19. That's still a concern (even though gasoline consumption has bounced back big time from its bottom) because cases are on the rise across much of the country, which could cool off demand.
Phillips 66 is well suited to handle these challenging market conditions, however, thanks to its diversified business model and rock-solid balance sheet. Those factors give it the financial flexibility to maintain its payout during the current downturn.
These dividends look like survivors
This year's dividend carnage has weighed on the valuations of stocks that have maintained their payouts, pushing their yields skyward. Because of that, investors can pick up some enticing payouts in hated stocks like Crestwood, Boston Properties, and Phillips 66. While those dividends aren't without risk, they seem increasingly likely to make it through this downturn intact.
