Income investors love high-yield stocks, but when a yield has shot upward because the share price has plunged, that can understandably be considered a yellow flag. Still, not all such investments should be automatically shunned. Some stocks that the market is fleeing from could be great contrarian bets if the underlying companies still have the prowess to grow and maintain their payouts. Here are three such out-of-favor stocks with high yields that deserve your attention right now.
The economy's reopening should boost this stock
Though the stock has rebounded significantly from its March lows, W.P. Carey (WPC 2.13%) is still down by about 28% in the past 12 months. Between that low price and a dividend that currently yields about 6.2%, it's a compelling bet.
As a real estate investment trust (REIT), W.P. Carey acquires properties and leases them under long-term agreements -- it has more than 350 tenants with a weighted average lease term of 10.7 years. It's also one of the most diversified REITs, with industrial properties bringing in roughly 24% of its annual base rent, warehouse and office properties around 22% each, retail 17%, and self-storage 5%.
Enticing high-yield dividend stocks can add power to your portfolio. Image source: Getty Images.
That income diversification, combined with contracted revenues, annual rent escalators built into its lease agreements, and its model as a net-lease operator -- which means that tenants are responsible for covering core costs such as maintenance and property taxes -- allows W.P. Carey to sail through challenging times like these. For proof, consider its rent collections and its dividend payouts. The REIT collected 97% of its total rent due in the second quarter, and 99% of what it was owed in September. In addition, it has increased its dividend payouts every year since 1998, and rewarded shareholders with yet another hike in September.
W.P. Carey's occupancy rate and rent collections should remain strong as U.S. economic activity continues to recover. With its third-quarter earnings report around the corner, watch out for this high-yield stock.
A contrarian bet on the energy sector
Oil stocks may be out of favor, but Enterprise Products Partners (EPD 0.18%) makes a good buy for two reasons: It's a midstream energy play, and therefore less impacted by energy prices, and it's earning enough money to maintain its dividend for now. The stock yields a fat 10.4% today.
Through the first half of the year, Enterprise Products Partners' distributable cash flow of $3.1 billion covered its dividends 1.6 times over, so there's not much to worry on that score. Moreover, it has boosted its payout annually for 21 consecutive years, usually through several quarterly increases. This being a turbulent year though, the company has stuck to a dividend of $0.445 per share for the past three quarters. However, that's still higher than what it paid out in the comparable quarters of 2019.
As mentioned above, one reason for its stability is that oil prices don't dictate income for a midstream energy company. Enterprise Products Partners transports oil and natural gas through its network of pipelines, storage, and transportation assets, and earns fees for those services: 86% of its 2019 gross operating margin was fee-based. As for its high debt load, its operating income covered its interest expenses nearly 5 times over in the trailing 12 months.
Enterprise Products Partners is slashing capital expenditures and recently shelved its M2E4 pipeline project. So the $800 million that would've gone to the project through 2022 will now be used to pare down debt and support dividends and share repurchases. That's a move in the right direction, at least from a dividend investor's standpoint.
Don't rule out this high-yield dividend stock just yet
AT&T's (T 1.30%) stock has taken a beating this year, and as a result, its dividend yield has shot up to 7.8%. Some even fear management will cut the payout, but AT&T is unlikely to give up its hard-earned Dividend Aristocrat status so easily. The telecom giant has increased its payouts for 36 consecutive years, and management is confident in its ability to sustain them.
Two key concerns are weighing on AT&T: Its debt load, which ballooned due to its Warner Media acquisition, and its DirecTV business, which is shedding subscribers at a troubling rate due to the cord-cutting trend. Those are valid concerns, but management is not sitting idle. AT&T is already reportedly looking for buyers for both DirecTV and its advertising business, Xandr. Just days ago, it sold its stake in Central European Media Enterprises for $1.1 billion, a move that fits in with its current strategy of monetizing non-core assets to "drive incremental shareholder value."
Meanwhile, CEO John Stankey recently listed AT&T's growth priorities at an investor conference. First is expanding its fiber network to ensure broadband connectivity as 5G rolls out. Second is building new "software-driven entertainment products." The focus here, of course, is on HBO Max -- AT&T wants to build an international media platform with better content that can monetize both subscription and advertisement-based services. Both its 5G network and content streaming will be tangible growth catalysts for the company.
After investments in growth, dividends are next on AT&T's priority list. Stankey is confident the company's growth moves should generate enough cash to sustain those payouts and pare down debt, both of which are important financial goals. Sure, chances are AT&T's upcoming dividend raises may be small, but any dividend growth should support the stock's high yield.
