I've been leery in the past of stocks that pay unusually high dividend yields. My view was that there had to be something wrong with them. What about the present? I remain cautious. When something seems too good to be true, it often is.
That said, I've come to realize that there are some stocks with exceptional dividends that are worth checking out. Here's why I've loaded up on these three ultra-high-yield dividend stocks.
1. Enterprise Products Partners
Enterprise Products Partners (EPD 0.97%) was one of the first ultra-high-yield dividend stocks I added to my portfolio. The midstream energy company currently offers a distribution yield of over 7.5%.
NYSE: EPD
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Buying shares of Enterprise Products Partners wasn't a difficult decision for me. The company has a solid business model, operating over 50,000 miles of pipelines. These and other midstream assets enable Enterprise to generate a steady revenue stream.
If Enterprise Products Partners were a member of the S&P 500, it would almost be dividend royalty. The company has increased its distribution for a remarkable 24 consecutive years with a compound annual growth rate of around 7%. I fully expect that streak to continue.
There are two primary knocks against Enterprise Products Partners. First, it's a master limited partnership (MLP), which complicates tax filings. Second, there's a push to replace fossil fuels with renewable energy. This trend could threaten Enterprise's business over the long term.
However, I'm not overly concerned about the tax hassles. I also think that the demand for oil and especially natural gas and natural gas liquids will increase over the next decade.
2. Medical Properties Trust
I bought shares of Medical Properties Trust (MPW 0.30%) (MPT) a few months ago. And I was fully aware of the problems facing the healthcare real estate investment trust (REIT).
The most serious of those problems are the significant financial difficulties for several tenants. These issues for the hospital operators leasing properties from MPT have caused the REIT's revenue and profits to tumble.
Like other REITs, MPT also has to deal with higher interest rates. This dynamic makes it more expensive to fund expansion programs. Even worse, the costs of servicing existing debt could increase in the future if rates remain high.
NYSE: MPW
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So why did I buy the stock? For one thing, I couldn't ignore MPT's sky-high dividend yield, which currently stands at over 13.2%. After analyzing the company's financial statements, my conclusion was that the dividend should be safe for now.
I also believed (and still believe) that the worst is over. The financial outlook is improving for hospital operators. MPT sold some properties and is using the proceeds to reduce its debt. Interest rates probably won't go much higher and could even begin to fall if the U.S. enters a recession. The stock's low valuation also gives it a margin of safety, in my view.
3. Cohen & Steers Infrastructure Fund
I'm cheating a bit with this one. Cohen & Steers Infrastructure Fund (UTF +0.56%) actually isn't a stock; it's a closed-end fund (CEF). However, UTF trades exactly like a stock on the New York Stock Exchange, so I've included it on this list.
UTF's ultra-high yield, which currently tops 8.2%, was admittedly a big draw for me. I liked that the CEF pays its distributions monthly, too. But I wouldn't have invested in UTF just because of its yield.
The fund's focus on infrastructure was especially appealing to me. I expect that the demand for infrastructure will grow over the next decade and beyond. UTF's holdings include many of the top infrastructure stocks on the market.
NYSE: UTF
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Also, the price was right. UTF currently trades at a 2.5% discount to its net asset value. It was even more of a bargain when I bought it several weeks ago.
This CEF does use leverage (borrowing) to juice its distributions. That's a double-edged sword in that it causes expenses to be higher but also boosts the yield. I'm not too worried about the leverage, though, since I anticipate that interest rates won't go much higher.
