The big bad wolf can huff and puff all he likes, but there doesn't seem to be much of anything standing in the way of the U.S. stock market and new all-time highs.
Since the market lows set back in March 2009, the S&P 500 and technology-heavy Nasdaq have returned in excess of 200% and nearly 300%, respectively. The move has also expanded the valuations (e.g., P/E ratios) of many stocks and sectors beyond what we've witnessed for many years. For some investors, this represents an opportunity to take profits, while others are using the low interest rate environment and expanding stock valuations as all the more reason to move some of their holdings into high-yield dividend stocks.
When lending rates are low (as they have been with the Federal Reserve targeting a federal funds rate near 0% for six-plus years), the amount investors can earn on a bank CD, money market, savings account, or even a bond, is pretty minimal. In fact, these safer investment tools may not even outpace inflation, causing an investor to earn a nominal profit but actually lose "real money."
To that end, high-yield dividends, if sustainable by the company that issues them, can be a great investment in a low interest rate environment. With that in mind, today we'll take a brief look at what I consider to be some of the best deals in high-yield dividend stocks.
But one quick note before we do so: High-yield dividends come with risks as well. If a company can't maintain its bountiful dividend, its share price could be affected to a level that's far beyond what you'd receive in dividend payments. A high-yield dividend might be alluring, but you shouldn't, under any circumstances, blindly chase a stock because of its dividend yield. Additionally, consider the following selections of mine as a jumping-off point for further research on your part and not a concrete declaration that these stocks are definitively headed higher. After all, sometimes good deals are risky propositions.
1. Annaly Capital Management (NYSE:NLY)
Within the financial sector, mortgage real estate investment trust Annaly Capital Management has been a regularly sought-after income stock for more than the last five years.
However, in recent quarters Annaly, an mREIT that purchases mortgage assets backed by the U.S. government, has fallen on hard times. The mREIT sector invests in fixed-income assets, but these assets tend to have an inverse relationship with lending rates. The bad news is that a rising lending rate environment could be right around the corner with the Federal Open Market Committee implying that a rate increase could happen later this year. Making matters worse, Annaly uses quite a bit of leverage to pump up its profits. And when net interest margins are declining due to rising rates, this same leverage can wallop the value of its asset portfolio.
Things may not be as dire as investors think, however. Annaly is arguably the most experienced of all mREITs, and it's survived the ups and downs of U.S. interest rates before, all while sporting an average yield over the last 15 years of 10%. Yes, an average dividend yield of 10%! Assuming Annaly's management sticks to a conservative investment strategy, then its forward P/E of less than 10, price to book of just 75%, and current dividend yield of more than 12% could make it an attractive buy. Even if its dividend is cut, I don't foresee its yield dipping below the 8%-10% range anytime soon. With that sort of yield, you could earn your investment back in nine years or less.
2. Philip Morris International (NYSE:PM)
Sometimes the best deals in high-yield dividend stocks can be found among the vice plays, such as tobacco producer Philip Morris International.
Like Annaly, Philip Morris has had its set of issues, such as black market problems in the Philippines and a general pushback against tobacco in general in some of the developed countries it serves overseas, like Australia.
But there are plenty of reasons to believe Philip Morris could be an attractive income stock for workers and retirees. For instance, it operates in most countries around the globe with the exception of one: the United States. The U.S. has some of the toughest regulations against the tobacco industry in the world. Instead, Philip Morris is able to spread its risk across the globe. If its prospects in Australia begin to look sour, it can just rely on India, China, or any other fast-growing emerging market with a growing, new middle class to boost cigarette sales. As with all tobacco producers, Philip Morris also possesses strong pricing power and is able to counter volume declines with price increases.
With Philip Morris International capable of producing more than $5 in EPS once again by 2017, and currently churning out a smoking-hot 4.7% yield, this could be an income-generating stock too good to pass up.
3. Alliance Resource Partners (NASDAQ:ARLP)
Finally, for one of the best deals in high-yield dividend stocks, I'd suggest looking in one of the unlikeliest of places: the coal sector.
As you might know, coal has been hammered over the past year. Coal is oversupplied, which has driven down prices. Despite coal being at an all-time low, the pressure from increasing environmental regulations coupled with natural gas prices that are even lower than coal have inspired some electric utilities to make the switch from coal-fired plants to natural-gas burning facilities. Making matters worse, even with a few coal producers heading into bankruptcy many are being recapitalized, which isn't helping the oversupply problems.
However, Alliance Resource Partners is a different breed. First, it can produce coal at a much lower cost than many of its peers, which is important when it comes to profitability. Second, Alliance Resource Partners' balance sheet is in relatively good shape, with only $835 million in net debt and $761 million in trailing-12-month operating free cash flow. In contrast, many of Alliance Resource Partners' peers have net debt of $2 billion or higher with an operating cash outflow. Lastly, and most importantly, Alliance Resource Partners establishes contracts for its mined coal years in advance. In many instances, only a small fraction of its output is ever exposed to volatile wholesale coal prices.
Based on its forward P/E of just 7 and its rising dividend yield that's approaching a whopping 11%, I'd suggest higher-risk income seekers give Alliance Resource Partners a closer look.