High Yield From Common Stocks: Income Now

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Includes: CINR, NCMI, TKC, WHG, WLKP
by: R. Paul Drake
Summary

Some retirees need to maximize current income from some of their funds.

My question today was whether common stocks, outside the usual suspects, might contribute to this purpose.

I sought such companies that pay out most of their income and whose dividends are well covered.

I found a few, but surprisingly few, worthy of consideration.

Some of my funds have the primary purpose of generating current income. This article supposes that you have a similar need. Treasury-bond yields do not meet your goals. This leads to a need to look to other, riskier investments. Several categories of investment, such as Preferred Stocks and Closed End Funds, may contribute. From the perspective of diversification, I would say they should contribute. But here the focus is on common stocks.

In the realm of common stocks, and for this portion of my portfolio, I have zero interest in growth stocks. For these funds, Dividend Growth Investing is far too slow and bond yields are too low. I want to find companies that pay out most of their income as dividends. I want these companies to be doing well enough that they can pay significant yields to me. The usual options in this space are Real Estate Investment Trusts (REITs), Business Development Corporations (BDCs), Midstream or LNG Limited Partnerships (LPs), and some Closed End Funds. All these areas deserve consideration, as you probably know. I am a fan of REITs, and for income of their preferred stocks. In this area, I am pleased to have High Yield Landlord to help me understand the options.

Here I wanted to see if we could find some options that go beyond the usual, in the area of common stocks. To do so, I used the Fidelity stock screener as follows. I screened for Dividend Payout Ratio from 75% to 125%. I really prefer companies in the low end of this range, but recognize that it is worth asking whether payout ratios somewhat above 100% are temporary. I also screened for Dividend Yield from 6% to 20%. I would love to get 10%, and would distrust yields much above that.

There ought to be a place in the market for companies that make near 10% and give nearly all of it to their stockholders. This is a fine model for retirement income. Even so, it is good to diversify with some component being more stable and having smaller yields. I had to exclude REITs from the comparison, because the Fidelity screener does not understand Funds From Operations (FFO) and so its payout ratios are not reliable. Otherwise, this set of criteria gets me 31 companies. Initially, I also pulled the total debt to equity ratio. I would not want this to be crazy. But examination of a few cases showed that the calculations by Fidelity, however they may be done, made no sense to me. So I took this column out of Table 1.

Table 1. Companies screened for payout ratios from 75% to 125% and yields above 6%.

Symbol

Company Name

Security Type

Security Price

Dividend Payout % (Last Quarter)

Dividend Yield %

SACH

Sachem Capital Corp

Common Stock

4.46

113

10.5

TPVG

TriplePoint Venture Growth BDC Corp

Common Stock

14.32

116

10.3

HRZN

Horizon Technology Finance Corp

Common Stock

11.65

106

10.2

FDUS

Fidus Investment Corp

Common Stock

15.8

88

9.9

NCMI

National CineMedia Inc

Common Stock

7.02

81

9.8

WHG

Westwood Holdings Group Inc.

Common Stock

30.13

107

9.2

ARCC

Ares Capital Corp

Common Stock

17.66

108

9.0

GPMT

Granite Point Mortgage Trust Inc

Common Stock

19.14

110

8.8

TRTX

TPG RE Finance Trust Inc

Common Stock

19.91

102

8.7

SAR

Saratoga Investment Corp

Common Stock

25.24

90

8.6

ABDC

Alcentra Capital Corp

Common Stock

8.35

79

8.5

NEWT

Newtek Business Services Corp

Common Stock

22.17

120

7.5

GBDC

Golub Capital BDC Inc

Common Stock

18.29

121

7.0

T

AT&T Inc

Common Stock

30.62

91

6.6

SNP

China Petroleum & Chemical Corp Sinopec

Depository Receipt

75.43

109

8.2

TKC

Turkcell Iletisim Hizmet AS

Depository Receipt

5.08

78

7.6

GPP

Green Plains Partners LP

Unit Trust Fund

15.16

110

11.9

CCR

CONSOL Coal Resources LP

Unit Trust Fund

17.72

86

11.6

DMLP

Dorchester Minerals LP

Unit Trust Fund

18.47

77

10.6

DKL

Delek Logistics Partners LP

Unit Trust Fund

32.18

122

10.1

EQM

EQT Midstream Partners LP

Unit Trust Fund

43.56

84

9.9

CINR

OCI Resources LP

Unit Trust Fund

24.46

81

9.3

CNXM

CNX Midstream Partners LP

Unit Trust Fund

15.3

78

9.2

HMLP

Hoegh LNG Partners LP

Unit Trust Fund

19.42

110

9.1

BPMP

BP Midstream Partners LP

Unit Trust Fund

14.07

84

8.8

SHLX

Shell Midstream Partners LP

Unit Trust Fund

20.06

86

8.2

WLKP

Westlake Chemical Partners LP

Unit Trust Fund

22.6

114

8.0

WES

Western Midstream Partners LP

Unit Trust Fund

30.66

111

7.8

SJIU

South Jersey Industries Inc.

Unit Trust Fund

51.40

105

7.0

ATAX

America First Multifamily Investors LP

Unit Trust Fund

7.06

79

7.0

DCUD

Dominion Energy Inc

Unit Trust Fund

50.23

86

6.7

Lo and behold, the highest yield we find here is less than 12%. This confirms the sense that bad things are afoot in companies paying much above 10%. As indicated above, the point here is not to find energy companies, REITs, or BDCs. The BDCs are (ABDC), (ARCC), (FDUS), (NEWT), (SAR), (GBDC), (HRZN), and (NYSE:TPVG). The midstream petroleum or LNG energy companies include (EQM), (CCR), (CNXM), (BPMP), (DKL), (DMLP), (GPP), (HMLP), (SHLX), (SJIU), (SNP), and (WES).

I am also not interested in companies focused on leveraged financing. I view these as likely the first to fail in the next interest rate crunch. These include the mortgage REITs eliminated already. In addition, (ATAX), despite being an LP, is focused on mortgage revenue bonds. I would group it with the mREITs. Some common stocks also are issued by mortgage companies, specifically (GPMT), (TRTX), and (SACH).

Possible ways to diversify

This leaves the following companies which have the potential to provide both high yield and diversification.

I will start with AT&T (T). One way and another, I have needed to be a customer of theirs for many decades. I detest this company. In multiple small ways, they have defrauded me. Most of the time, their execrable customer service has made it impractical to recover the money they have, in effect, stolen from me. I have no hope of producing a single objective thought about them. This company has massive coverage on Seeking Alpha. You can look at that.

Turkcell (TKC) provides digital services in Turkey, Ukraine, Belarus, Azerbaijan, Cyprus, Germany, and the Netherlands. It has had some coverage on Seeking Alpha, most recently by Stephen Simpson. One can see in their recent slides that Turkcell is seeking to transform itself from a cell phone network company to a digital services company. Among other things, this has led them to divest their investment in cellular networks in Kazakhstan. Overall, their leverage seems modest and their margins seem excellent. They face macroeconomic challenges in Turkey and an internal leadership transition. But it seems to me that their long-term story will reflect their success in competing for subscribers. Overall, there are some clear risks, but this might be a good diversifier. It pays a 7.6% dividend yield.

Westlake Chemical Partners LP (WLKP) is a company that specializes in ethylene production and transport. This is not in the mainstream space of oil and natural gas, being a refined product that is used extensively to produce plastic. It is in a cyclical industry, but one that is not entirely tied to oil. This company has not been covered on Seeking Alpha for two years. What I see on their balance sheet information is that they have about $530M in liabilities, most of which is long-term debt, and total equality of about $1,460M. The equity of the common unit holders, though, is only about $410M. Even so, it appears superficially that the leverage is quite modest at about one third of equity. I am not experienced enough with MLP finances to reliably parse the details. Hopefully someone knowledgeable in this area will soon give this company a look. They have been steadily increasing their dividends. The dividend yield is now 8.0%, but Fidelity thinks they are not quite covered. Overall, this company seems worth a look. It might be a good source of diversification in the LP space.

Ciner (CINR) is focused on soda ash, which is a raw material in flat glass, container glass, detergents, chemicals, paper, and other consumer and industrial products. It has had frequent recent coverage on Seeking Alpha, much by Silver Coast Research. In their most recent investor presentation, they claim a distribution coverage of 1.28. They also show total long-term debt of $99M, a nicely small fraction of the equity of $260M. The excellent leverage could be temporary, though, as they have an available credit facility of $136M. They describe this as having balance sheet flexibility, which could let them respond to opportunities. CINR has 9.3% dividend yield. Within the LP space, this seems like it might be another valuable diversifier.

National CineMedia, Inc., (NCMI), through its subsidiary, National CineMedia, LLC, operates a digital in-theater advertising network in North America. This company has not been covered on Seeking Alpha since Julian Lin promoted a successful trade 20 months ago. This is a confusing company to me. It shows income, a 7% profit margin, and a dividend yield of 9.8%. But it shows a negative book value on finviz and strongly negative debt to equity on the Fidelity screen. In their 2018 Annual Report, though, they claim a small but positive book value. Movies are not dead. I hope someone on Seeking Alpha will save me the effort of finding a way to understand this company.

Westwood Holdings Group, Inc. (WHG), a money manager, had some favorable coverage on Seeking Alpha two years ago. Since then it has cratered. It lost nearly half its value. During April it has dropped precipitously. Their Q1 2019 earnings call slides are full of glowing descriptions with zero quantitative content, followed by financials showing substantial and continuing declines in fee revenue, and that they are now far short of covering their dividend. If this is a diamond in the rough, it is pretty dirty now.

Conclusion

This exercise for the most part confirmed what is easy to know. For high yield, high payout rates, and tolerable debt to equity, look to REITs, BDCs, and Energy LPs. If you must, look also to mREITs and similar companies. Beyond that, this screening exercise found a few firms worthy of a deeper look.

Disclosure: I am/we are long ARCC, SRC, GMRE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an investor but not an investment advisor.