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3 Stocks to Buy With Dividends Yielding More Than 6%

By Chuck Saletta – Sep 22, 2020 at 6:15AM

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In a low interest rate world, are there really higher-yielding companies worth considering?

With even 30-year Treasury bonds offering yields below 1.5%, investors looking for decent levels of income from their portfolios need to search far higher up the risk curve. While several stocks offer higher yields, the risk in searching only for yield is that many such companies turn out to be yield traps.

To find a company with a higher payout and good chances of sustaining its dividend, you need to understand how the company generates its cash and why it's so generous with those payments. Ones with seemingly sustainable dividends may very well be worth considering. With that in mind, here are three stocks to consider buying with dividends yielding more than 6%.

Investor with rising stacks of coins.

Image source: Getty Images.

1. North America's largest energy infrastructure company

Canada-based Enbridge (ENB 0.84%) is the largest energy infrastructure company in North America. It makes its money shipping energy -- largely oil and natural gas -- from where it's produced to where it's processed or consumed. Enbridge currently sports a yield of around 8%,  and its dividends are well covered by its operating cash flow.

Enbridge can afford to pay its investors such a large dividend because of the nature of its business. Pipelines are expensive to build, and people and governments often object to their construction. Yet once they're in place, they tend to be a very cost-effective way of moving energy around. That combination gives an incredible advantage to companies with large pipeline infrastructures already in place. As North America's largest such company, Enbridge certainly benefits.

Enbridge is a Canadian company, so U.S. shareholders will see their dividends fluctuate each quarter based on the exchange rate changes between the U.S. dollar and the Canadian dollar. In addition, U.S.-based investors who own Enbridge outside of an IRA will face a mandatory withholding tax on those dividends. Still, Enbridge pays a decent dividend that it has increased for 25 consecutive years. While not a guarantee, that history is a good sign that the company intends to continue paying.

2. A real estate company geared toward an aging population

A person pushing the wheel of their wheelchair.

Image source: Getty Images.

America's population is aging, and Americans are having fewer children as well. That combination means that more people will need assistance in the future, but will have fewer younger family members available to provide care. With that demographic reality ahead, chances are that demand will remain robust for senior-focused healthcare services like assisted living and nursing homes.

That happens to be Omega Healthcare Investors' (OHI 2.12%) strong suit. Omega Healthcare Investors is a real estate investment trust that focuses on skilled nursing and assisted living facilities. As an REIT, it must pay out at least 90% of its earnings in the form of dividends. That helps ensure it will always offer a fairly high yield as long as its underlying business is profitable.

Currently, the company offers shareholders a $0.67 per share per quarter dividend. That translates to a yield of around 8.2%. Despite the pandemic-related business challenges that nursing homes are facing, Omega Healthcare Investors' recent dividends have generally been covered by its operating cash flows. That bodes well for its ability to continue making those payments, and suggests that once COVID-19 is under control, the company may even be able to resume increasing them.

Regardless of what happens in the near term, the key reason to consider an investment in Omega Healthcare Investors is that long-term demographic trend. Unless there's good reason to believe those trends will change or that automation will dramatically reduce the need for assisted living services, the REIT is well positioned for what's likely to come our way.

3. A unique mortgage REIT 

Generally speaking, mortgage REITs are fairly heavily leveraged businesses. The typical model is to borrow cheap, shorter-term money and use it to buy longer-term, higher interest generating assets in the form of mortgages. The primary risk with that model is that when borrowers default or when interest rates swing in the wrong direction, the mortgage REIT's debts still need to be paid. Too much leverage at the wrong time can end up crushing the business.

A model home resting on top of a paper chart and a document that says "Your mortgage application: APPROVED."

Image Source: Getty Images.

Broadmark Realty (BRMK 1.44%) avoids that particular problem by having absolutely no debt of its own on its balance sheet. That gives it incredible operational flexibility and enables it to navigate the current uncertain times in a much better way than it otherwise would be able to.

Broadmark Realty operates as a hard money lender -- meaning its lending is generally secured by the property being borrowed against. The key risk in that model is that if the project or property it's lending money on goes sideways, Broadmark could wind up with an unfinished project on its hands instead of a clean and profitable exit. Carrying no debt of its own on its balance sheet enables it to manage hiccups like that without risking debt covenants.

The company pays a monthly dividend that currently sits at $0.06 per share.At a recent share price of $10.23, that gives it a yield of just over 7%. That's below the yield of other major mortgage REITs, but still higher than the general market. Given the combination of its unleveraged balance sheet and its still-risky operating environment, that's a reasonable spot for it to sit relative to its peers.

Know the business first, then consider the stock

Investing in higher-yielding stocks can be a worthwhile endeavor, but only for investors who understand the underlying business and have a good idea of whether its dividend will continue to be paid. While there are no guarantees in investing, there are at least decent reasons to believe these three companies have a good chance of being able to continue to reward their shareholders. If you're looking for cold, hard cash from your investments, these companies are certainly worth considering.

Chuck Saletta owns shares of Broadmark Realty Capital Inc. and Enbridge and has the following options: long January 2021 $40 calls on Omega Healthcare Investors, short January 2021 $40 puts on Omega Healthcare Investors, short January 2021 $30 puts on Omega Healthcare Investors, short January 2021 $28 puts on Omega Healthcare Investors, and short January 2021 $42 calls on Omega Healthcare Investors. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.

Stocks Mentioned

Enbridge Stock Quote
$39.59 (0.84%) $0.33
Omega Healthcare Investors Stock Quote
Omega Healthcare Investors
$29.86 (2.12%) $0.62
Broadmark Realty Capital Stock Quote
Broadmark Realty Capital
$3.88 (1.44%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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