With the stock market moving closer to all-time highs, a lot of investors are still looking for stable, safe investments. Ones that also reward shareholders with a large, high-yield dividend are even more attractive. Sadly, high-yield stocks are often yield traps, or troubled businesses that aren't able to maintain their payouts, setting stock buyers up for more bad days ahead.
But that's not always the case. If you know where to look, there are still plenty of high-quality companies that have a high dividend yield and the cash flows to back it up. We recently asked three Fool.com contributors for their top stocks for high yields and relative safety, and they came back with W.P. Carey (WPC -1.70%), Prudential Financial (PRU -0.61%), and Enterprise Products Partners (EPD 0.45%). Keep reading to learn why.
A remarkable REIT
Eric Volkman (W.P. Carey): Veteran real estate investment trust (REIT) W.P. Carey is currently celebrating its 50th anniversary. It's a business that has been returning money to its shareholders at generous levels since 1998. Its quarterly dividend is nothing to sneeze at, tipping the scales at a 5.9% yield.
What sets W.P. Carey apart is that it is extremely diversified; REITs tend to focus on a geographic location, a certain type of real estate, or both. This one likes to spread the risk -- as of the end of March, it held 1,530 properties in the U.S. and across the ocean in Europe. Its portfolio includes most major facility types in the commercial REIT industry, including retail, industrial, warehouse, office, and even self-storage.
The great advantage of this kind of structure is that W.P. Carey isn't overly exposed to any one property type or location. The company has plenty of other revenue-producing facilities if there's, say, a recession in Europe or a meltdown in the U.S. retail sector. At the same time, this gives it the fluidity to concentrate on one place or type that's doing well.
Higher interest rates have sapped investor interest in W.P. Carey stock. Real estate is a very capital-intensive business, and most REITs have a decent amount of leverage. While this particular one hedges by putting inflation clauses into many of its leases, a higher cost of borrowing is cause for concern.
Despite that, the company's business continues to expand. In its most recently reported quarter, W.P. Carey managed to improve its revenue by an impressive 24% year over year. Adjusted funds from operations (the most crucial profitability metric for REITs) also rose, climbing 8%. And for the 25th year in a row, the company raised its dividend -- it's now a shade under $1.07 per share.
What's more rock-solid than an actual rock?
Chuck Saletta (Prudential Financial): Insurance giant Prudential Financial puts so much importance on being a rock-solid business that it uses the Rock of Gibraltar as its corporate logo. Add its $1.25-per-share quarterly dividend -- about a 5.2% yield as of this writing -- to the mix, and you get that elusive combination of a company with an attractive yield that also looks like a fairly safe investment.
As robust as that payment is, the company should be able to support it quite nicely. Prudential Financial is anticipated to earn around $12.01 per share in 2023 and $13.12 per share in 2024. That puts its payout ratio safely below half of its projected earnings.
Of course, projections and pictures of rocks don't pay the bills when things go wrong, and every company faces challenges from time to time. And on that front, Prudential Financial sports over $17 billion in cash and more than $320 billion in bonds available for sale to cover costs above and beyond what it expects to cover.
As an insurance company, Prudential Financial is in the business of pricing risks. It expects to pay out a huge chunk of what it collects from its premiums. If its risks wind up worse than expected, that cash and those bonds provide a quickly available source of money to cover those extra costs. It's that balance sheet strength that truly gives Prudential Financial the rock-solid financials to justify the use of the Rock of Gibraltar as its logo.
Prudential Financial did have to cut its dividend during the financial crisis. Still, it did fairly quickly recover its distribution, and today's payout is well above what it paid out to shareholders prior to that cut. Ultimately, that shows the company's commitment both to protecting its rock-solid financial foundation and to rewarding its shareholders for the risks they're taking by investing. For investors looking for companies truly focused on the long haul, that's a great combination to have.
Valuation matters
Jason Hall (Enterprise Products): Eventually, humanity will move beyond the bulk of its needs for oil and gas. But it's likely to be many years before that happens, and in the meantime, investors can -- and should -- capitalize on the potential for cash flows from the companies that have track records of both steady operations and being excellent stewards of shareholder capital. Enterprise Products Partners checks off both of those boxes.
Enterprise Products' core business is energy logistics. It has 50,000 miles of pipelines, owns storage facilities that can hold hundreds of millions of barrels of product, and operates several dozen facilities that gather, process, and distribute various products across the oil and gas value chain. And it does it safely and responsibly, consistently being named to lists of America's most trustworthy and responsible energy companies.
It's also doing it in this brutally cyclical industry while consistently growing its dividend payout every year for more than two decades. In fairness, its stock hasn't been a market-beater over the past decade with a bull market that's seen the S&P 500 gain almost 12.5% annually while Enterprise dealt with a multiyear lag from the prior oil market cyclical peak.
But looking forward from today, Enterprise is primed to do very well. With a 7.4% dividend yield and very high likelihood of modest annual increases continuing for the foreseeable future, this is one of my favorite oil stocks for dividends to buy right now.
