A stock that has a dividend yield in the double digits can be incredibly tempting to an investor. The problem with dividend stocks is that so many of those high yields are eventually cut because the businesses can't continue to support the payout.
That isn't always the case, though. Some companies have monstrously high yields that aren't at much risk of being cut.
So we asked three of our energy contributors to highlight a stock with a double-digit yield that has the fundamental strength to keep paying its investors. Here's what they had to say.
Now that the dust has settled on the merger of Williams Companies (NYSE:WMB) and Energy Transfer Equity (NYSE:ET), we know that Williams Partners (NYSE:WPZ) will remain an independent entity. That means its parent won't snap up its yield of slightly more than 10%. Instead, under the new corporate arrangement there's quite a bit of potential for Williams Partners investors to see that distribution head even higher in the future.
First of all, there are three important value drivers for Williams Partners that will result from the business combination between Energy Transfer and Williams Companies:
- Williams Partners is expected to benefit from up to $400 million in annual cost savings and synergies by joining the Energy Transfer shared service model.
- It will be able to acquire assets from the greater Energy Transfer group.
- It will receive a $428 million breakup fee from Williams.
These three factors will combine to do two things. First, they will provide greater distributable cash flow security. Second, the acquisitions provide tangible opportunities for distributable cash flow growth.
In addition, before the settlement of the new merger, Williams Companies and Williams Partners boasted of having more than $30 billion in future organic growth projects in their combined backlog. While not all of those projects will be built within Williams Partners now that it will remain independent, it will get its fair share of organic projects in the coming years. That organic growth will be a key fuel to grow the company's already robust distribution.
Suffice it to say, Williams Partners' double-digit distribution isn't likely to go anywhere but up in the years ahead.
The last place you'd probably expect to find a company with a double-digit yield that can actually hold up is in the coal sector, but surprisingly there's one company in this beaten-down sector that looks to have the legs to maintain its payouts: Alliance Resource Partners (NASDAQ:ARLP)
Even though we've seen the price for coal decline precipitously for several years now and companies have gone bankrupt left and right in this space, Alliance is still turning a rather impressive profit on its coal. For the past 12 months, Alliance has maintained a 35% EBITDA margin, as most of its newer mines have lower extraction costs and the location of its mines in the Illinois Basin lowers transportation costs. So it can be more competitive than other sources of coal and even compete with low natural gas prices.
Also, unlike so many others in the space that are saddled with mountains of debt, Alliance has maintained a pretty clean balance sheet. With about $933 million in net debt, its net debt-to-EBITDA ratio is only 1.4 when so many U.S. coal companies have debt loads 10 to 20 times larger than their operational profits. Without the high costs of interest payments, the company can pay out to its investors.
Most encouraging, though, is that Alliance is rather conservative with its payout despite being a master limited partnership. Unlike other MLPs that pay out close to or all of their distributable cash flow every quarter, Alliance retains more than a third of its cash flow to reinvest in the business and give its payout some wiggle room in the event that prices get worse over time.
The long-term outlook for coal doesn't look great. There are lots of headwinds facing the industry, including cheap natural gas, the rapidly declining costs of alternative energy, and climate change-related regulations. So I can't say with any certainty whether Alliance will be able to maintain its current plan for multiple decades. But coal is still a large part of our energy mix, and if Alliance continues to push its competitors out of the market, then the company should be able to preserve its 14% distribution yield for a while.