If you're a dividend investor, this pullback has affected you a lot. Although the S&P has only pulled back some 5%, "bond equivalent" sectors are down a lot more due to rising bond yields.
Because of this, we now have a bevy of equities yielding over 5%, many of which were much more expensive only a couple weeks ago. In this article I will focus on six companies. All of them are high-quality, all of them have some growth behind them and all of their stocks now yield over 5%. Investors who are income and dividend-minded should consider adding these stocks to their portfolio now.
While these six are all buyable here, this is not a bottom call. This pullback is happening because bond yields are rising. If they keep rising at these rates, dividend stocks will continue to see downward pressure. Furthermore, the historic precedent for pullbacks is between eight and twelve percent. Thus far we've seen only five percent. Many of these stocks could continue dropping from a fundamentals perspective. However, I believe each represent a buying opportunity for dividend investors and a chance to build up income.
Healthcare Trust of America (HTA)
- Dividend Yield: 5.1%
- Price/FFO: 19.7
- Market Cap: $2.5 billion
Healthcare Trust of America is a Real Estate Investment Trust, or REIT. They acquire and operate medical office buildings and related facilities and then collect rent from the tenants. A medical office building is an office and laboratory for the use of physicians and other health personnel. Healthcare Trust is mostly in United States metro areas and located primarily on or "across the street" from healthcare campuses. They own 214 medical office buildings and 24 other healthcare-related facilities. The company is fairly new to Wall St, having only been public for two quarters.
Healthcare Trust's business model is easy to understand: they are a company that collects rent on medical office buildings. The healthcare sector is slated to grow as a percentage of GDP in coming decades, and Healthcare Trust adds predictability to that growth with their office-focused business model.
Management's long term goal is to grow same-store Net Operating Income by 2-3% while making "rifle shot" acquisitions. Given the company's small size, they can be both selective and nimble in acquisitions. Only acquisitions with higher cap rates (Operating Income/Asset Cost) that are purely classified as medical office buildings are considered.
While Price/FFO does seem a little rich at 19.7 (FFO is "Funds From Operations," the standard earnings measurement for REITs), there are two things we must understand: First, that this company has only been public since 2012. Historically, this ratio is of limited value. Secondly, few other medical REITs are purely in medical office buildings. In fact, this may be the only one.
At this Price/FFO ratio, the stock could no doubt come in some more. Still, Healthcare Trust's business model is a compelling one and they are positioned to take advantage of healthcare's growth in a steady, predictable way. With a dividend yield at 5.1%, Healthcare Trust has a place in any dividend-centered portfolio.
EPR Properties (EPR)
- Dividend Yield: 6.5%
- Price/FFO: 10.7
- Market Cap: $2.3 billion
EPR Properties is another REIT. They are the landlord for 103 megaplex theaters, 9 entertainment recreation centers, 44 public charter schools, 7 family entertainment centers, 13 metropolitan ski areas, 3 water parks and a few others. Readers in Texas may recognize Schlitterbahn water parks. EPR is the landowner for three of their four parks.
EPR is less focused but more diversified than specialty REITs such as Healthcare Trust. They are also less diversified and more focused than their larger retail counterparts such as Realty Income (O) or Kimco (KIM). Their business model is in the middle of the spectrum.
Over half of EPR's income comes from megaplex theaters, and that is their growth engine. Box office receipts have been growing at a compounded rate of 3 to 4 percent since the 70s. Their water park tenant, Schlitterbahn, has seen attendance grow 3 to 5 percent year on year since 1977. Even with higher interest rates, these trends are going to continue. Income grew high single digits in the last quarter. In the long run, growth like this makes EPR properties different from a bond, and therefore safer from this fallout in the long run.
EPR is very reasonably valued here and provides a high yield, 6.5%. Being involved in a non-necessity like entertainment, EPR may be viewed as more risky than retail or apartment REITs hence, the traditionally lower valuation. EPR is right at its normal Price/FFO ratio and hasn't been below it since 2008. Therefore, opening a position or adding shares of EPR Properties is a fairly safe bet.
- Dividend Yield: 5.2%
- Price/Earnings: 18.6
- Market Cap: $184.8 billion
AT&T is the largest telecommunications company in the United States. It operates mostly in two segments: Wireless and Wireline. Wireless includes both wireless voice and data (for smartphones). Wireline includes land line voice, managed networking to business customers, and U-verse, which is broadband Internet, cable TV and voice.
The case for AT&T is this: The company has refocused on long-term growth trends such as wireless data from smartphones and tablets. In 2012 they finally put the costly distraction of a failed acquisition of T-Mobile behind them. Growth in AT&T's income and dividends will be modest, between just two and four percent. But even modest growth will protect the investor against inflation. And unlike many other high-yield stocks, AT&T has actually reduced its share count over time, not increased it.
AT&T's valuation is fine here. It is just about trading at its normal Price/Earnings (P/E) ratio. Could the stock fall from here? Sure, but downside is limited. It hasn't traded below its normal P/E since 2010. With a yield of 5.2%, investors should consider adding some AT&T.
Realty Income (O)
- Dividend Yield: 5.3%
- Price/FFO: 17.5
- Market Cap: $8.0 billion
Realty Income is also a REIT. They acquire and own freestanding retail properties which generate rental income from long-term leases, typically between ten and twenty years. Their agreements are triple net leases, which means that the tenant is responsible for property taxes, insurance and maintenance. Realty is large by REIT standards, with a broadly diversified portfolio of over 2,600 properties.
Returning to our REIT comparisons, if Healthcare Trust is very specialized but not diversified, Realty Income would be the polar opposite. In diversification there is safety.
Realty's management has done a good job of removing themselves from areas most affected by e-commerce and a slump in low-income spending. For example, they have moved out of low-income retail which does not offer deep value or a necessity: one of their favorite tenants these days are dollar stores. Continuing the safety theme, Realty has become more selective in the credit worthiness of new tenants, in effect preparing themselves for a time of higher interest rates. If any REIT is ready for higher rates, it's Realty Income.
Take a look at the above chart from FAST Graphs. We see smooth and steady FFO growth. While the Great Recession of 2008-9 did decrease earnings, it wasn't by much. Notice also that this stock had a huge run since the beginning of the year, spiking and then recently losing nearly a quarter of its market cap. That's a huge drop and one that brings Realty closer to its Fair Value.
Yes, the stock does have some ways to go before it reaches fair value. And yes, the stock's price trajectory does look like a falling knife: it could easily fall another 10%. I like the yield here, but Realty is treated as a bond-equivalent by the market despite a fairly smooth FFO growth rate of 4.9%. Buying the stock at these levels means challenging the bond-equivalent assumption.
Textainer Group (TGH)
- Dividend Yield: 5.0%
- Price/Earnings: 9.6
- Market Cap: $2.0 billion
Textainer Group purchases, manages and leases a fleet of intermodal marine cargo containers, or container freights. They have a total fleet of over 1.6 million containers, representing over 2.4 million twenty-foot equivalent units.
Textainer is a more cyclical business: a leveraged play on global trade. But there's also a secular tailwind: The growth of containerization is multiple the growth of world GDP. Despite the global slowdown, this is a strong industry and Textainer is the largest and arguably best-managed player. Also, 82% of their fleet is under long-term or financed leases. This smoothens out the income stream and softens the inherent jaggedness of global trade.
Textainer has a Beta of 1.68, meaning that the correlated volatility is 68% more than the S&P 500's. The stock moves around quite a lot. But as we can see on FAST Graphs, their P/E ratio is now only 9.6. This is right about at the stock's normal P/E ratio. If you believe that the world's economy will pick up, then global trade will follow, as will the fortunes of this company. Not only that, you'll get a 5% dividend for your trouble.
Kinder Morgan Energy Partners (KMP)
- Distribution Yield: 6.47%
- Market Cap: $86.51 billion, combined with KMR, KMI and EPB
Kinder Morgan is a pipeline transportation and energy storage company. It operates energy terminals, transports CO2 directly to oil fields, is the largest transporter of natural gas in North America, has a products pipeline division for a variety of products, and finally operates the only pipeline in Canada that connects Alberta to the Pacific Ocean. Kinder Morgan is a Master Limited Partnership, which means that they are enjoy the limited liability status of a corporation but income is taxed as a partnership. Because of this, they do not pay corporate taxes. They are the largest pipeline company in North America.
Kinder Morgan was the first company to use the Master Limited Partnership structure as a growth vehicle. Most of the company's early growth has come from acquisitions: CO2 fields and pipelines, intrastate gas pipelines, and bulk and liquids terminals. Most of Kinder Morgan's recent growth has come from new projects, for example a massive expansion of the Trans-Mountain pipeline in Canada.
Distributions are usually at or near 100% of Distributable Cash Flow (DCF). All of their income is paid to unit holders. Management is able to do this because cash flow is extremely predictable: they lock in very long-term contracts with customers, many for as much as 30 years.
This steady growth is very well depicted by FAST Graphs and reflects the fruition of Mr. Kinder's and Mr. Morgan's vision. The pink line, distributions, might be the most important because nearly all of KMP's DCF is distributed to unit holders. It is not surprising then, that the stock's price has correlated most with the distribution payout. And we can see that now is a fine time to buy. The stock price has just about hit its floor and has not fallen below the pink dividend line since 2008. KMP stock will not likely fall below $76. It is currently at $80, which I believe is a good value considering its yield.
Although some of these stocks now only have limited downside, this is by no means a bottom call. All of these stocks are, at this price and this yield, a buying opportunity for some. They are all also high-quality companies which I personally believe in, but each of them have a story of their own and may not be suitable for your needs. Here are my final thoughts:
- AT&T is a good low-risk play that will not dilute your ownership and is trading at just about its normal P/E ratio.
- Kinder Morgan has a great yield, limited downside and excellent growth, past and future.
- Textainer's sub-ten P/E ratio is attractive, especially considering the long-term containerization of trade. It is a bet on a recovery of the global economy.
- Healthcare Trust of America is a fairly new company to Wall St. They have a compelling yet simple business model and I believe management deserves a chance.
- EPR Properties has impressive growth and trades at a very low Price/FFO ratio. They are very near fair value and their yield is very generous here.
- Finally, Realty Income's large, diversified portfolio with a new focus on securing rent in today's challenging environment will pay off. However, the stock is still a bit above fair value and looks something like a falling knife.