With interest rates stuck at rock-bottom levels, finding yield for your savings in this market has been tricky. With 10-year Treasuries paying around 0.66%, and AAA-rated investment-grade bonds running at around 1.56%, most income investors would do better to look at high-yield stocks to generate needed growth.
But finding a safe, high-yield stock in this volatile market is no easy task. But it is doable. Here are five companies that have weathered the coronavirus crisis reasonably well and are in a position to maintain or raise their dividends going forward to get that high yield you've been looking for.
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1. AGNC Investment
AGNC Investment (AGNC 0.55%) is a mortgage real estate investment trust (mREIT) that invests primarily in mortgage-backed securities, which are guaranteed by the U.S. government.
The mREIT sector struggled during the March-May time frame as liquidity issues in the bond markets caused mREITs to take drastic actions to remain solvent. Almost every one was forced to sell assets, cut its dividend, and reevaluate its business model.
While AGNC Investment was also forced to deleverage and cut its dividend, it was in the best shape of all the mREITs. AGNC pays a $0.12 monthly dividend, which works out to a 9.9% dividend yield. The stock also benefits from the Fed's purchases of mortgage-backed securities. Since AGNC has almost no credit risk, it will fare better than most financials if the economy rolls over again.
2. Realty Income
Realty Income (O 0.55%) is a REIT that focuses on stand-alone buildings with triple-net leases (a lease agreement where the tenant is responsible for the property expenses like taxes, insurance, and maintenance, in addition to rent and utilities). It's a newly minted Dividend Aristocrat (meaning it has raised its dividend annually for at least 25 consecutive years) and bills itself as The Monthly Dividend Company.
Realty Income has managed to navigate the COVID-19 shutdowns better than most retail REITs because its tenant base is largely made up of companies that sell essentials: drugstores, supermarkets, and convenience stores, for example. So far, it seems like most of its tenants are making their rent payments. Despite the pandemic and all of the uncertainties, Realty Income raised its dividend in June. At current levels, the stock pays out $0.234 per share per month and yields 4.4%.
3. Kilroy Realty
Kilroy Realty (KRC 1.00%) is an office REIT that specializes in top-rated (aka Class A) properties in the biggest cities on the West Coast. The ease with which many corporations adapted to mass working-from-home transitions has raised questions about the longer-term prospects for prime urban office space.
While that is a valid concern, Kilroy mentioned on its second-quarter earnings call that it is sanguine about tenants staying in their spaces. Many of Kilroy's tenants are in the life sciences industry, which simply is not conducive to a work-from-home model to begin with. From what its clients are saying, more employees may work from home, but businesses are going to maintain central offices.
While Kilroy is still dealing with issues from retailers who lease space in its office buildings, it collected 95% of its rent in the second quarter. At current levels, dividends for the stock yield 3.6%.
4. Bank of New York Mellon
Bank of New York Mellon (BK 1.55%) is one of the biggest trust banks in the United States. Trust banks have a different business model than the typical bank: Bank of New York Mellon earns much of its income from transaction fees, not taking credit risk. The company handles cash for large investment firms, helps corporations handle their day-to-day funding needs, and is one of the biggest fixed-income clearing firms.
The clearing business basically means settling trades by ensuring the seller has the securities and the buyer has the money. Volatility and increased Fed activity benefit this line of business.
BNY said on its earnings call that it expects to maintain its $0.31 per share quarterly dividend and will begin stock buybacks when regulatory and market conditions allow. The Fed doesn't want banks buying back stock right now, given the state of the economy. At current levels, Bank of New York Mellon pays a 3.5% dividend. Even if the economy turns lower, it will be in better shape than a typical bank.
5. PennyMac Financial Services
PennyMac Financial Services (PFSI 2.84%) is in one of the hottest businesses right now: mortgage banking. The Fed has cut rates to the floor, and this has triggered a massive refinancing wave. According to one estimate from Black Knight, there are over 19 million high-quality refinance opportunities. With a typical mortgage loan at, say, $400,000, that amounts to the potential for almost $8 trillion in refinanceable mortgages.
In 2019, the total volume of originations came in at $2.2 trillion, and the Mortgage Bankers Association forecasts a total volume of $3 trillion in 2020. The Fed just forecast that interest rates will stay at current levels through 2023, and it will continue to purchase Treasuries and mortgage-backed securities.
PennyMac Financial can't be considered a high-yield stock right now, but business is so good, it will probably continue to raise its dividend (it increased its August payout from $0.12 to $0.15 per share). The stock pays an annual per-share dividend of $0.60, and it is expected to earn $15.73 per share this year, which works out to a paltry 4% payout ratio. Note as well that it is trading at a 2020 price-to-earnings ratio below 4 and a 2021 price-to-earnings ratio of 5.6 times. PennyMac has ample room to increase its 1.02%-yielding dividend and should be a higher payer. Even increasing the payout ratio to 10% of earnings would amount to a dividend yield of 2.7%.
