Dividend stocks can be great for generating passive income. Investors can collect the biggest paydays from companies with high dividend yields. Unfortunately, those higher yields often come with higher risk profiles. Because of that, investors need to keep a close eye on high-yield dividend stocks before adding them to their portfolios.
Five companies with big-time payouts worth watching are DCP Midstream (DCP), Omega Healthcare Investors (OHI 1.30%), Hess Midstream Partners (HESM), Office Properties Income Trust (OPI -1.72%), and EnLink Midstream (ENLC 0.15%). Here's what investors should look out for at this intriguing group of income stocks.
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DCP Midstream: Current yield 6.7%
DCP Midstream is a master limited partnership (MLP) focused on operating natural gas gathering and processing assets. At first glance, the company's big-time payout looks sustainable because it's currently generating more than enough cash to cover its dividend and expansion program. However, it has more exposure to volume and commodity price fluctuations than most peers because of its contract structure. On top of that, it has junk-rated credit. Another downturn in the oil market could force DCP Midstream to reduce its dividend again. Investors should look for improvements to its balance sheet and business model before buying DCP Midstream for income.
Omega Healthcare Investors: Current yield 7.5%
Omega Healthcare Investors is a real estate investment trust (REIT) focused on owning skilled nursing and assisted living facilities. The dividend looks like it's on fairly solid ground. The REIT generates more than enough cash to cover its payout despite the pandemic's impact on some of its tenants' ability to pay rent, and it has a solid investment-grade credit rating. However, there's some concern about the long-term effect COVID-19 will have on senior care properties like the ones it owns, which have been hit especially hard. If occupancy rates don't recover to their pre-pandemic levels and costs remain high, more of its tenants might struggle to pay rent. Investors should keep an eye on that headwind and look for signs that it's abating before buying shares of Omega for its dividend.
Hess Midstream Partners: Current yield 7.9%
Hess Midstream Partners is an MLP focused on gathering natural gas in North Dakota, mainly for its parent Hess (HES 0.49%). The company currently generates more than enough cash to cover its big-time payout. Further, it expects its cash flow to grow as Hess expands its output in the region, targeting 5% annual growth through 2022. However, its focus on one region and one customer puts its dividend at a high risk of reduction if Hess changes its game plan or oil prices plunge again. Dividend investors should keep an eye out for steps Hess Midstream takes to diversify before adding the stock to their income portfolio.
Office Income Properties Trust: Current yield 8.4%.
As the name suggests, Office Income Properties Trust is a REIT focused on owning office buildings. The company primarily leases buildings to a single tenant with high credit quality, like government agencies. Add that to a reasonable payout ratio and an investment-grade balance sheet, and its big-time dividend seems secure. However, the COVID-19 outbreak forced many office tenants to pivot to remote work to slow the spread. While most companies plan to return to the office once the pandemic subsides, some have said they'll allow employees to work from home permanently. There's some concern about future occupancy levels and rental rates in the office REIT sector. Given those concerns, investors might want to wait and see if companies to go back to their offices later this year before adding this REIT's dividend to their portfolio.
EnLink Midstream: Current yield 8.9%
EnLink Midstream shares many of the same characteristics as DCP Midstream. On the positive side, it generates more than enough cash to cover its current payout and expansion projects. On the other hand, it has an elevated leverage ratio and high exposure to commodity price volatility. Income investors should look for signs that its balance sheet is strengthening and that the oil market is back on solid ground before buying EnLink to generate passive income.
Interesting income ideas to keep an eye on these days
DCP Midstream, Omega Healthcare Investors, Hess Midstream Partners, Office Properties Income Trust, and EnLink Midstream all boast paying eye-catching dividends. However, with those higher yields come higher risk profiles. Investors should look for signs that the issues facing these companies are fading before buying shares in hopes of generating passive income.
