High dividend yields are often a sign that investors don't believe a company can continue the dividend payments to investors over the long term. Sometimes an industry has changed for the worst, and other times a company's finances have deteriorated to a point of no return. Whatever the reason, a high dividend yield is sometimes seen as a warning sign for investors.
In the case of three high-dividend yields from AT&T (NYSE:T), MGM Growth Properties (NYSE:MGP), and Simon Property Group (NYSE:SPG), I think the market has gotten it wrong. These stocks are all yielding over 6% and still have a lot going for them over the long term.
AT&T's long-term advantage is in place
AT&T's stock has fallen 15.6% in the past year and is one of the few stocks that hasn't recovered at all since the pandemic hit in March. That's partly because management put a share buyback plan on hold and partly because of the disastrous launch of HBO Max, AT&T's new streaming service.
The HBO Max developments may be the most concerning. Time Warner was acquired for $85 billion in 2018, partly on the thesis that owning content will be a valuable resource for a telecommunications company that's distributing media to consumers. And Time Warner's media assets were some of the best in the business. But a month after launching, HBO Max had just 4.1 million subscribers, well behind the pace of 26.5 million paid subscribers for Disney+ in the first three months it was available. Worse yet, the combination of the HBO cable channel, HBO Go, and HBO Max has left consumers confused about what they're subscribed to. As often happens when a product launch falls flat, the management of WarnerMedia was shaken up over the past few months. Former Hulu CEO Jason Kilar is taking charge of the business, and the hope is that this move will lead to a turnaround.
You can see why investors have questions about AT&T's business given what's going on at Time Warner. But if we take a step back and look at the company's finances, we see that it's still performing very well. And with 5G coming to the wireless business and Sprint and T-Mobile's merger reducing competition, there could be growth and margin expansion in the wireless business.
I see the current turmoil in AT&T's operations as a blip on the radar. It'll get streaming figured out eventually and may even figure out a way to bundle it with wireless services. In the meantime, investors are getting a cash flow machine in one of the three main wireless companies in the U.S. and a 7% dividend yield, which is too good to pass up.
A REIT that still has a bright future
If you think the depressed state of entertainment and gambling in Las Vegas from COVID-19 will be a long-term trend, then MGM Growth Properties isn't the stock for you. But if, like me, you think Las Vegas will bounce back, just as it did after the Great Recession, then buying a high-yield REIT that owns much of the Las Vegas Strip's real estate is a great way to play the region.
MGM Growth Properties collects rent from casino operators, just like any REIT, and has a small amount of upside if casinos grow revenue, but this is ultimately a regular REIT play. Still, I think the company has some understated advantages in the current environment. Interest rates are extremely low, as seen by an $800 million 4.625% senior notes offering on June 5, and that will keep financing costs low over the long term. Second is that Las Vegas' real estate is extremely valuable just based on its location, putting something of a cap on the amount of value the company can lose. Finally, in a highly regulated business like gambling, supply is limited, so the risk to casino companies is far lower than it is to a company like a hotel operator. These will all play into the company's recovery.
Another thing to note is that Las Vegas has already made an impressive recovery. Casinos that have opened are already seeing gambling volumes that are about half of pre-pandemic levels, despite many safety restrictions. Give the industry another year or two, and I think it'll be back to normal. And that makes the current 6.9% dividend yield look cheap.
Malls are making a comeback
There's no question that COVID-19 has hit malls hard. Most were closed in April and May, and even now that they're open, operations aren't back to normal. But for a mall REIT like Simon Property Group, the rent is starting to flow again. In the second quarter of 2020's earnings release, management said 51% of contracted rent was collected in April and May, and that figure increased to 69% in June and 73% in July, before accounting for rent abatements. Clearly, the trends are looking up.
Despite all of the challenges in the quarter, net income was $254.2 million, and funds from operations were $746.5 million, or $2.12 per share.
As far as dividends go, management said it still expects to pay dividends of at least $6 per share in 2020, which is a 9.3% yield right now. I think the mall business will return once again, and when it does, the premier destinations that Simon Property Group owns will be great dividend generators.
Unloved dividend stocks
They have different underlying businesses, but AT&T, MGM Growth Properties, and Simon Property Group all have a lot going for them as the pandemic passes and business returns to normal. And if the economy rebounds in 2021, these could be great growth dividend stocks again.