2 High-Yield Opportunities No One Is Talking About

Summary

• Many investors are married to the U.S. equity market.
• They either invest in U.S. dividend stocks (yielding extremely low right now) or high tech growth stocks (priced at all time highs).
• We prefer to find under-the-radar opportunities with high yield and upside potential. We offer 2 such examples below.
• Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

JamesBrey/E+ via Getty Images

For dividend investors or value investors, it’s an increasingly difficult environment to find deals as dividend stocks continue to rip higher:

Data by YCharts

However, even though the broader market is very richly valued, there always are pockets of value to be found.

Some of our favorite pockets of value right now include:

• Businesses Punished By COVID: Believe it or not, short-term pandemic fears are still impacting some stocks, many of which have not even come back to their pre-pandemic prices yet.
• Boring Businesses: Even at all-time highs, investors are still chasing sexy tech and growth names. There’s certainly nothing wrong with innovation, but this exact mindset has actually made boring yet essential infrastructure businesses a much better value.
• Foreign and Emerging Countries: Many investors are heavily concentrated in US equities. If you learn how to navigate the withholding tax hurdles, there's still great opportunity and diversification in other markets around the world.

Furthermore, these opportunities pay yields well above the S&P’s (SPY) measly 1.4%. You can see how this portfolio compares in the graph below:

That said, it’s not enough to just identify broader subsectors of the market that deserve attention. Below, we go one step further and show you some of our stand-out stocks that fit into our current investment themes:

Telefonica - A Foreign Telecom Powerhouse

Most investors haven’t heard of Telefonica (TEF) even though the company is currently Spain’s largest telecom company. Even more impressive - the company is growing globally. Telefonica is seeing rapid growth in:

• Germany
• The UK

Of course, every dividend investor is aware of AT&T (T). But for that name-brand recognition, you’re also paying a premium, even with the lackluster performance the company has had for the past years.

Furthermore, AT&T has alarming levels of debt. When the valuation is adjusted for the company’s leverage, it’s actually trading near all-time highs:

Source: Tikr

This kind of insight only becomes clear when we use EV/EBITDA. To the untrained eye, AT&T appears cheap, until you take a closer look. It’s unfortunately a classic value trap.

If we use this same methodology to value Telefonica, the company is extremely cheap compared to AT&T:

Source: Tikr

But the company also has other tailwinds working in its favor:

While many businesses today are getting extremely complicated and making haphazard acquisitions just to stay alive (AT&T has certainly been a victim of that), Telefonica is trimming the fat and simplifying its operations. Even still, they continue to announce impressive deals. Management recently finalized a sale of their towers to the renowned American Tower (AMT).

All around, the company is reducing unnecessary complexities and doubling down on the operations that actually bring in robust cash flow.

Like AT&T, the company does have debt, but it's prioritizing paying it off. The fact that they are aware of this and are aggressively working to improve the balance sheet is refreshing.

Overall, the financials are in a good place, with an incredible ~20% free cash flow yield easily covering the market-leading ~8% dividend yield:

Source: Tikr

The company is by no means perfect, but it's trading at such a low valuation relative to its peers, offers a high yet sustainable yield, and is positioned to grow going forward.

ATCO - A Hot Discount on Essential Infrastructure

ATCO (OTCPK:ACLLF) has an incredible track record for a company that most people have never heard of.

The company has raised its dividend for nearly three decades and outperformed the broader market while doing it.

Yet this premier infrastructure company flies under the radar of nearly every investor. Why? Because it is boring:

Source

And yet boring infrastructure like the kind ATCO owns and operates is the lifeblood of the world economy.

The company has a $22 billion diversified portfolio of:

• Ports
• Energy transportation
• Real Estate
• Logistics
• Utilities

Source

These are business operations backed by real assets, all of which are essential in nature. As a result, the company generates extremely reliable cash flow from very predictable long-term contracts.

Sure, you aren’t getting the potential growth of the next new tech company. But you get a predictable, cornerstone investment that has rewarded shareholders with increased dividends for 28 years.

Even then, we believe the company does have growth potential too. The US and other countries continue to discuss significant investments in infrastructure, which will prove a major tailwind over the coming years for companies like ATCO.

In a separate article, we went so far as to call infrastructure a "generational investment opportunity” because governments around the world are extremely indebted and need the help of private investors to fund large-scale infrastructure projects via private/public partnerships.

Some companies already have repriced in light of this trend, like Brookfield Infrastructure Partners (BIP), which hovers near all-time highs:

Data by YCharts

Yet ATCO’s share price has flatlined even in the face of steady dividend increases from management:

Data by YCharts

But perhaps the craziest thing of all is that ATCO is actually less risky of an investment than BIP.

Its portfolio of infrastructure is more diverse, while BIP is reliant on riskier midstream businesses. Plus, the balance sheet is in better shape. ATCO boasts $1 billion of cash on hand and has an A- credit rating from S&P.

It’s hard to rationalize the disparity in performance between ATCO and BIP. The only conclusion we can draw is that ATCO is significantly undervalued relative to its peers. If we chart the company’s price-to-book value, it is currently at a near all-time low in terms of value:

Data by YCharts

To be clear, BIP is a fine holding too, and we think it's fairly valued here. The company is similarly essential, generates huge cash flow, and has plenty of growth ahead of it.

But ATCO’s share price hasn’t even come back to where it was before the COVID sell-off, showing it’s still aggressively discounted for no good reason that we’re aware of:

• To reach its pre-COVID share price, Atco would need to rise 25%
• To catch up to BIP’s valuation, it would need to rise nearly 50%

Clearly, there's plenty of upside potential. And you get to lock in a 4.5% yield while you wait. Not bad.

Bottom Line

If you want to make real money in the markets, oftentimes you must be a contrarian. That means moving against the crowd into unloved stocks and sectors with lots of potential.

Despite the mainstream focus on growth stocks, we continue to find attractive investment opportunities elsewhere.

Investors must zig when others zag, to paraphrase Sam Zell. The High Yield Investor portfolio is currently doing that, and the results speak for themselves.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ACLLF; TEF either through stock ownership, options, or other derivatives. 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.

Comments

[just-another-newbie]

@High Plains Investor I have been a TEF fan. SA still shows the dividend as 15.23; other sites have it at 7.23 on up. Schwab has it at 9.68. Fidelity trader pro shows it as zero. I tried searching but didn't find my answer online -- is TEF's dividend a "special" dividend -- meaning there is no dividend commitment from TEF on paying dividends?

[extramoney]

ATCO & BIP are my infrastructure holdings in my Canadian portfolio.
They are all held in my IRA to avoid foreign taxes.
Fidelity does give access to trading in Toronto & no trading fees.

[Erik2647]

Is there a foreign tax on TEF if held in an IRA?

[High Yield Investor]

@Erik2647 Yes. It is best to either hold it in a taxable account or request your dividend fully in shares. If you take the dividend fully in shares then you will not be charged a foreign withholding tax. Disclosure: I am not a tax expert and this is not tax advice. Just my personal opinion based on my own experience.

[Go595lf]

This is what I found in Google:

Payments made by a resident of Spain to a non-resident in respect of certain types of interest payments, rents, royalties, dividends, management or administration fees are subject to tax at the rate of 19% / 24%.

[Go595lf]

Agree with your points and appreciate the article. I am going to research on Telefonica (TEF), I own the stock a couple of years ago and I think that there is a foreign tax on the dividends paid.

[johngonole]

@Go595lf lol, unless they withhold it they ain't gettin it... Note: I don't own any shares but screw that. I have enough tax docs to file.

[JayPar]

@Go595lf There is, plus they pay the dividend only every 6 mo and can be irregular. Won't buy this for those reasons.

[Livejoyfully]

@High Yield Investor thanks for a article. Always good to hear about new ideas. Re ATCO: looking at their op income, net income - declining; payout ratio getting close to a 100%. Div growth and high chowder is great, but that's history. What are your thought on their ability to sustain div growth and the div all together given the decrease in earnings? In this case it looks like their div history is about to change

[Dividend Pro]

Have to completely disagree on ATCO.

Non-voting ACO-X.to and voting ACO-Y.to (ATCO) have both drastically UNDERPERFORMED both the slow-poke TSX60 and red-hot SPY for the last 5, 10 years.

NOTHING TO LIKE HERE. Nice dividend, but you left a LOT of money on the table by investing in these.

You actually LOST money over 5-years. Read that sentence again.
Yes, the company stock performance was stellar 20 years ago, not today. And that is what matters.

They do make nice trailers though, if you want to invest into one of those to live in.

[Chalmus0]

I'd love to own ATCO (currently long BIP and other infrastructure stocks), but my broker doesn't have pink sheet stocks. I know that it is a financial and regulatory burden to list yourself on a major US exchange, but I would bet that at least some of the discount is due to that. Not only small investors avoiding pink sheets (either intentionally or unintentionally), but I would assume that some funds and maybe ETFs also avoid them.

[Peder Steen Jensen]

@Chalmus0 your broker doesn't give access to trading in Toronto?

[Chalmus0]

@Peder Steen Jensen Not as of yet, no. Now that almost all brokers have gone to a free trade model I might look around, but the one I use was one of the first ones to offer completely free trades, and I REALLY like their auto-balancing model and some other quirks that I haven't seen elsewhere. There are a few companies like ATCO that I am interested in owning, but so far it hasn't been compelling enough for me to want to switch brokers or open another account somewhere else in addition to my current broker.

[mr.jjm]

@Chalmus0 there is also the fact that some commission-free brokerages will charge for OTC trades; I'm with TD Ameritrade, and I have to pay about $7 every time I buy or sell shares of certain Canadian companies (TransAlta Renewables and Innergex, to name two). Atco looks like one to own, but I hesitate to pay that commission since I'm a small fish opening small positions.

[CPA022784]

What is the current tax withholding on Spanish source dividends? Also, your puzzlement about ATCO vs BIP valuations would probably be solved if you first used a more appropriate peer choice such as other utility companies since that is where the overwhelming majority of their EBITDA comes from. The infrastructure business is a minority part, but a nice diversification.

[Will104]

@CPA022784

Appears to be a standard 19 percent which can be reduced under tax treaty to 5 percent for US shareholders

In practise getting the tax back from most European counties can be quite painful - so only worth doing if you’ve a material amount of tax to get back or enjoy dealing with foreign tax authorities :)

[alchemist11]

TEF is a great stock that flies under the radar! I've been loading up on it.

[Pablo]

@alchemist11 TEF I bought a bit early. It's dogging it right now. Holding it. May buy more.

[leearther]

interesting write up, thx

[JoeMonte]

Excellent Article and analysis. Thank you! High Yield investor has been a great source of investing for me. I appreciate the tools and information you and Sam provide.