5 Dividend Growers With 8%+ Yields And High Return Potential
Summary
- Dividend growth stocks as a group have crushed the market over time.
- In the current low-interest rate environment, most dividend growth stocks have low yields.
- Today we present five stocks that combine meaningful dividend growth streaks with extremely attractive yields and significant total return potential.
- Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »
Dividend growth investing is a proven model for generating long-term outperformance.
In fact, dividend growers have historically crushed the broader market (SPY):
Unfortunately, with interest rates (GOVT) near historic lows, dividend-paying stocks are in high demand, pushing yields on quality dividend growth stocks (VIG) to historical lows:
That said, for discerning and diligent investors, there still exist high-yield dividend growth stocks. Today we present five stocks that combine meaningful dividend growth streaks with extremely attractive yields and significant total return potential:
#1 - Enterprise Products Partners (EPD)
The most attractive pick in this list, EPD boasts a 22 year distribution growth streak and a very attractive 8% yield.
Not only that, but the blue chip midstream MLP also has one of the finest asset portfolios in the entire midstream industry and a BBB+ credit rating, giving it a sector-leading balance sheet.
With billions of dollars in liquidity, a whopping 20.6 year average term to maturity and attractive 4.4% average cost of debt, and 1.6x distribution coverage, the distribution is safe and appears poised to continue growing well into the future.
EPD is our top pick to successfully weather the challenging outlook facing the midstream sector and should see continued price appreciation in the months and years to come as its distribution growth combines with increased market confidence in its cash flow durability in a low-interest rate environment.
It is important to note that EPD does issue a K-1.
#2 - Phillips 66 Partners (PSXP)
PSXP is another midstream MLP that offers investors a mouth-watering 10.6% distribution yield that looks extremely attractive on a historical basis:
Additionally, it boasts a 7-year distribution growth streak, backed by remarkable adjusted EBITDA and DCF growth in recent years and a resilient performance in the face of the COVID-19 and energy industry headwinds in 2020:
Leverage is fairly modest with the Debt-to-EBITDA ratio reported at 2.9x as of Q4 and the distribution is also covered 1.2x by DCF.
The main concerns here are (1) that its general partner - Phillips 66 (PSX) - is the majority unitholder and can conduct a roll-up or other restructuring at any time to serve its own purposes over the unitholders' and (2) it has sizable exposure to the Dakota Access Pipeline (DAPL). If DAPL were to be forced to close, the company would take a meaningful hit, pushing its leverage higher and possibly forcing them to slash the distribution. While the upside potential is clear here and the status quo of the company implies a safe and extremely attractive income stream, the risks could quickly interfere with the investment thesis. As a result, we view it as a speculative strong buy.
It is important to note that PSXP does issue a K-1.
#3 - MPLX LP (MPLX)
Our third and final MLP in this list, MPLX offers an extremely attractive combination of yield, balance sheet strength, and distribution growth.
It has an 8-year streak of distribution growth, a BBB credit rating along with modest leverage, and a mouth-watering yield of 10.5%:
Even more impressively, its distribution was covered ~1.6x in Q4, enabling it to continue investing opportunistically in growth projects while repurchasing discounted units.
While the balance sheet and asset portfolio aren't quite as strong as EPD's, its 3.9x leverage ratio is sufficiently low to enable investors to sleep well at night while its superior yield compensates them for the incrementally higher risk.
MPLX joins EPD in the strong buy category, even if management teams of both partnerships slow distribution growth in the future in order to repurchase more units at steep discounts.
It is important to note that MPLX does issue a K-1.
#4 - Sixth Street Specialty Lending (TSLX)
Our lone BDC pick, TSLX boasts a 6-year dividend growth streak and an attractive forward yield of 7.7%. However, its actual yield is likely much higher given its track record of regularly paying out hefty specialty dividends to investors.
For example, over the past year alone, it has paid out a whopping $3.54 per share in dividends, good for an incredible 16.6% yield on the current share price.
Even more impressively, despite paying out such aggressive amounts of dividends, TSLX has been able to sustain its book value per share over time and maintain an investment grade balance sheet. It should be little surprise, then, that it has significantly outperformed SPY and the broader BDC market (BIZD) since inception:
Given its well-diversified portfolio across industries and individual borrowers, TSLX still offers investors attractive risk-adjusted total return and income potential despite its strong recent performance.
That said, the price does trade at a meaningful premium to book value which is also on its high-end historically, so more conservative investors may wish to wait for a more opportunistic entry point.
#5 - Arbor Realty Trust (ABR)
Our fifth and final pick - ABR - is a mortgage REIT that invests primarily in multifamily loans, but also invests across a diverse group of other commercial real estate assets.
Its portfolio is further strengthened by significant geographic diversification, a reasonable 78% long-to-value ratio, and a fairly short 18.9 weighted average months to maturity.
Management has grown the dividend for 8 years in a row, buoyed by opportunistic and aggressive accretive share issuances that have grown book value and AFFO per share:
The 8.2% forward yield is also well-covered by cash flows (the forward payout ratio is a very reasonable 72%), enabling management to keep its leverage under control and not be reliant on share issuances during tough market conditions to fuel its dividend growth.
Part of the reason it is able to generate such strong returns is that it invests primarily in bridge loans - which typically command higher interest rates than regular mortgages - and further enhances those returns with leverage, giving it investment ROEs of between 12% and 15%.
Any management team that earns the following compliment from famed investor Leon Cooperman on their Q4 earnings call deserves respect in our view:
Let me just first congratulate you and your team, Ivan. You guys have done a terrific job for the shareholders and you stand out in a class by itself, and I think you deserve a shout out.
While the stock isn't cheap right now, it is extremely well managed and still offers compelling total return potential in a low interest rate environment given the strong fundamentals in multifamily, the high well-covered dividend yield, and the growth momentum in the company.
Investor Takeaway
While it is certainly true that dividend growth investing has never been harder than it is today given the low interest rates and lofty stock market valuations, opportunities still exist. In this article, we presented five potentially rewarding dividend growth opportunities with well-covered and very attractive dividend yields.
While the K-1s may be a deal breaker for some and TSLX and ABR aren't necessarily cheap at the moment, these stocks at the very least warrant a closer look by any dividend growth investor seeking higher yield than the paltry 1.5% offered by the mainstream dividend growth ETFs today.
If you want full access to our Portfolio and all our current Top Picks, feel free to join us for a 2-week free trial at High Yield Investor.
We are the fastest growing high yield-seeking investment service on Seeking Alpha with over 600 members on board and a perfect 5/5 rating from 61 reviews:
Our members are profiting from our high-yielding strategies and you can join them today at our lowest rate ever offered.
With the 2-week free trial, you have nothing to lose and everything to gain.
Get Started Today!
This article was written by
Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.
Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.Analyst’s Disclosure: I am/we are long EPD. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (28)
I would have included MMP instead of PSXP(which is a dice roll on DAPL). MMP offers a 10% yield with top rate management & as strong a balance sheet as EPD. Coverage is currently lean at 1.1x, as a result of an outsized covid hit to volumes. But looking forward, it's predominantly gasoline and jet fuel pipelines should present an outsized recovery play as the economy re-opens, and coverage should return to management's 1.25x longtime standard. This is a management team that, besides maintaining financial health and a strong balance sheet, has consistently been the most profitable of all MLP's on it's investments. This is top quality. Adjusted risk/reward, seems to me a better bet than PSXP- unless you have a gambler's streak looking for a favorable DAPL outcome.
