Big dividend yields can be alluring. They make it seem easy to turn a little bit of money into an attractive income stream.
Unfortunately, many higher-yielding dividends are at high risk of getting cut if market conditions deteriorate. That is likely the case with The Necessity Retail REIT (RTL +0.00%) and its 14.3% dividend yield. Because of that, yield-focused investors should avoid that stock and instead consider buying Energy Transfer (ET +1.40%) or Verizon (VZ +0.02%). They offer much more sustainable high-yielding income streams.
Need to see more improvements
The Necessity Retail REIT is undergoing a major strategic shift. The real estate investment trust (REIT) started the year as American Finance Trust, a diversified REIT with retail, office, and warehouse properties. However, the company sold off most of its office properties earlier this year, acquired a large shopping center portfolio, and rebranded as The Necessity Retail REIT to showcase its focus on owning necessity retail properties.
NASDAQ: RTL
Key Data Points
That needle-moving retail deal helped grow the company's adjusted funds from operations (FFO) by 18% to $0.26 per share in the third quarter. Given the current dividend rate of $0.21 per quarter, it had an 81% dividend payout ratio, which is a reasonable level for a REIT.
However, one big red flag puts that payout at risk: the balance sheet. The REIT had a 9.4 times debt-to-EBITDA ratio at the end of the second quarter, which is really high for a REIT. Further, 10% of its debt matures next year, and 17.5% of its total debt is floating rate. As a result, its interest expenses will rise next year. The company is working to address its balance sheet issues by selling properties. It's on track to close $405.4 million of sales by year-end and plans to sell more properties next year. These sales and rising interest rates will put downward pressure on its adjusted FFO. Consequently, the REIT might have to cut its dividend, allowing it to retain additional cash for debt reduction.
Back on solid ground
Energy Transfer offers investors a yield approaching 9%. That big-time payout is more likely to rise than fall. The master limited partnership (MLP) has already increased its payout by 70% this year. Meanwhile, it's targeting to return the quarterly rate to its former peak, implying it could go up by another 15%.
NYSE: ET
Key Data Points
Energy Transfer was in the same spot as The Necessity Retail REIT a few years ago. However, it made the tough decision to slash its payout, enabling the MLP to retain more cash to repay debt. The company generated enough cash last quarter to cover its distribution by 1.9 times, providing it with excess cash to finance its expansion program and repay debt. Because of that, it's on track to reach its targeted debt-to-adjusted EBITDA ratio of 4.0 to 4.5 times by the end of this year, putting it firmly within investment-grade territory. Meanwhile, Energy Transfer's expansion-related investments could eventually enable the MLP to grow its payout beyond its former peak.
A cash flow machine
Verizon's dividend is almost up to 7%. Like Energy Transfer, that massive dividend is more likely to head higher than lower in the future. The communications giant has increased its dividend for 16 straight years, the longest current streak in the U.S. telecom sector.
NYSE: VZ
Key Data Points
Verizon can easily support its current dividend level. The company generates a massive amount of cash. Cash flow from operations totaled $28.2 billion through the third quarter. While that was down from $31.2 billion during the year-ago period, it was more than enough to cover its capital expenditures ($15.8 billion) and dividend ($8.1 billion). That enabled it to produce excess cash to strengthen its already rock-solid balance sheet. Verizon has a conservative 2.7 times debt-to-adjusted EBITDA ratio and A-rated credit from one rating agency. While the company is having a down year in 2022, it expects its investments in 5G and recently launched cost savings initiatives to grow its cash flow in the future. That would put it in an even stronger position to continue increasing its high-yielding dividend.
Much more sustainable income options
The Necessity Retail REIT's balance sheet woes put its 14%-yielding dividend at risk of a reduction. While the company is taking steps to address its issues by selling assets, that might not be enough. Because of that, income-focused investors should avoid that payout and consider Energy Transfer and Verizon instead. Their big-time payouts are on a firmer foundation, making them likely to continue rising in the future.
