2 High Yield Bargains To Load Up Today

Summary

• Recent market fears have created bargain dividend opportunities.
• I highlight 2 high-yielding names that can be had at value prices today.
• Both come with durable business models and strong balance sheets.
• Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »

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The path to riches isn't easy and you should probably run away from anyone who says that it is. One thing is for certain though, and that is time is on your side when it comes to compounding returns that can multiply your wealth down the road.

As the saying goes, getting to the first million takes the longest, but many investors have found that it's much easier to get from one to two million than it is to get to that one million in the first place. Once again, this is due to the magic of compounding returns.

That's why it's important to pick stocks that have durable competitive advantages and steady income streams that can help take you there. It also helps to buy them when they fall out of favor with the market. In the words of Joel Greenblatt, it's best "to buy above average companies at below average prices."

In this article, I'm focused on 2 durable names that are trading in value territory while paying a high dividend yield. I highlight what makes them good candidates for generating long-term income and growth, so let's get started.

Pick #1: VICI Properties

In a crowded field of net lease REITs, VICI Properties (VICI) truly stands out with its premier portfolio of irreplaceable assets. At present, VICI owns 28 gaming facilities (including Caesars Palace) featuring nearly 18K hotel rooms and 200+ restaurants, bars, nightclubs, and sportsbooks.

VICI has greatly diversified its portfolio base since being spun off from Caesars Entertainment (CZR) in 2017. As seen below, the pending transactions to acquire The Venetian from Las Vegas Sands (LVS) and MGM Growth Properties (MGP) will go a long way in reducing VICI's exposure to Caesars Entertainment down to 42% of its annual base rent.

(Source: Investor Presentation)

In addition, 84% of VICI's rent roll comes from S&P 500 tenants and 100% of its leases are triple-net, meaning that its tenants are responsible for paying property tax, insurance, and maintenance. This is a key reason for why VICI saw a high 96.7% operating margin (with depreciation addback) over the trailing twelve months.

VICI also stands out among its net lease peers for its ultra-long weighted average lease term of 43 years. This compares favorably to the ~10 years for peers Realty Income (O) and National Retail Properties (NNN) and 14 years for STORE Capital (STOR).

Meanwhile, VICI's stock has taken a dive since October, falling from the $30-level to $26.75 at present. As seen below, VICI now carries an RSI score of 26.75, indicating that it's in oversold territory.

(Source: StockCharts)

This is likely driven by fears around the Federal Reserve tapering its bond buying program, and around the recent Omicron COVID variant. I don't see either of these factors as throwing a wrench in VICI's long-term growth prospects. For one thing, real estate is among the best asset classes to be in during times of inflation. Plus, gaming properties have proven to be rather resilient in face of the pandemic, and short-term fears around Omicron likely isn't going to impact long-term consumer behavior.

Looking forward, VICI has a long growth runway, as less than 40% of gaming properties are owned by publicly-traded REITs. VICI maintains a strong balance sheet, with a net debt to LTM adjusted EBITDA of 3.1x, and has $670M in cash on hand.

At the same time, the recent share price weakness has driven the dividend yield up to 5.4%. The dividend was recently raised by 9% and comes with a safe payout ratio (for a net lease REIT) of 79%. As seen below, VICI has mostly A and B dividend grades, and the C grade for dividend consistency is only because of VICI's short history as a public company.

(Source: Seeking Alpha)

I view VICI as being a Strong Buy at the current price of $26.75 with a forward P/FFO of 14.9, and with analysts expecting 9-10% annual FFO/share growth over the next two years. This means that VICI has a cheaper valuation and faster expected growth rate than its net lease peers Realty Income, National Retail Properties, W. P. Carey (WPC). As seen below, VICI's EV/EBITDA of 14.8 sits well below that of its aforementioned net lease peers. I see the recent dip as being a gift for dividend investors.

(Source: Seeking Alpha)

Pick #2: Magellan Midstream Partners

Magellan Midstream Partners (MMP) is an MLP (note: issues schedule K-1) that has a moat-worthy network of pipelines and storage terminals across the Eastern and Central regions of the U.S. This includes the longest petroleum pipeline system in the U.S., covering 9,800 miles, 54 terminals, and 47M barrels of storage capacity.

MMP has seen share price weakness as oil prices have come down, and the recent concerns around the Omicron variant has added to the pressures. As seen below, MMP is once again trading towards the low end of its price range since the start of the summer.

(Source: StockCharts)

While recent headline risks may put some pressure on E&P (exploration and production) companies, the fact remains that MMP's business model is more immune to these pressures. This is reflected by the primarily fee based business, which represents 85% of MMP's operating margin, as seen below.

(Source: Investor Presentation)

MMP also benefits from the lack of alternatives to its refined product pipelines, which provides more than 40% of refined products to 7 of the 15 states that it serves, and the current U.S. administration's stance towards fossil fuel infrastructure only reinforces the value of MMP's existing infrastructure.

It's also worth noting that MMP's pipelines aren't one-trick ponies and can be adjusted to transport renewable fuels, as it has been a provider of ethanol and biodiesel services for many years, and MMP leads its peers with a 16%+ historical average return on invested capital.

Meanwhile, MMP is performing well, with distributable cash flow growing by 7% YoY during the third quarter. This was driven by strong distillate demand across its entire pipeline system and by management's continued cost optimization efforts. MMP also maintains a strong BBB+ rated balance sheet, with a safe debt to EBITDA ratio of 3.75x, well-within management's long-standing target maximum level of 4.0x.

The recent share price weakness has pushed MMP's distribution yield up to a high 9.1%, and it's well-covered with a 1.2x DCF to distribution coverage ratio. The distribution has grown at a 5-year CAGR of 4.9% and comes with 20 years of consecutive annual growth.

MMP is a solid high income Buy at the current price of $45.74. As seen below, MMP's EV/EBITDA ratio of 12.97 currently sits at the low end of its 5-year valuation range. Sell side analysts have an average price target of $53. Long-term buyers at the current price should see robust income and growth for many years to come.

(Source: Seeking Alpha)

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI, MMP 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.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[labman106]

MMP is on stock I buy when it tanks. It has been all down hill since 2014 for MMP. [check the SA chart]. I buy when the stock hits the lower $40 region. [seems that is the floor] Plus the dividend is higher.

[Aricool]

good ideas. thx. however, re MMP, why take the debt vs growth risk of a single name like MMP? instead I just buy large amounts of MLPA & MLPX and get even higher divys & total return w/o the BK / debt risk. JMTC.

[gebarnhart]

Mr Market can't figure how to think of MLPs, so they are thrown into the "Energy" category, so they move up and down with oil prices even though they are well insulated from commodity prices. Then as "Energy" companies they are branded as "dirty" and shunned by funds such as pensions and universities. THen MLPS come with baggage that keep them out of some funds. Just be happy withn the outsize incomes and stop pointing out the irrationality of the Market.

[gebarnhart]

The big "kicker" for VICI will arrive in 2nd half of 2022 when the MGM buy is completed.

[404040]

I’m long VICI. Feels good right now.

[CincinnatiRick]

I don't see where equities such as O and NNN are "peers" to VICI. I would have found a comparison with actual peers in the gaming sector, such as GLPI far more useful.

[Kurt Licherovsky]

Two good picks. I've been accumulating both at lower prices.

[abcde1]

can anyone comment on whether VICI's long-term leases have inflation multipliers in them, and if so, what they might be?

[Rye147]

@abcde1 Yes, VICI does have protection from inflation. About 90% of their properties are tied to a CPI lease agreement. So, rent will rise annually based upon inflation.

[Zach Nye]

@Rye147 IIRC, the two largest casinos are capped at 2% increases though.

[Kurt Licherovsky]

@abcde1 inflation is not a big deal, big exaggeration. Supply chain disruption will go away. The big deal is the rise in employment and people going back to work as the risk from Covid subsides.

[Bemylov]

I have yet to understand why SA articles keep promoting this stock? What is there for them? 3 articles on this one stock since last week.

[Weather Man]

@Bemylov

Price disparity and yield attract attention with everything else priced to the moon.

[Randol33]

@Bemylov The authors are likely underwater on the name and need to pump a better exit price.

[pelican11]

@Randol33 Nonsense.

[Slade_01]

Great summary. I own them both and continue to add.

[Zach Nye]

@911Slade same, own both and have added to both in the last few weeks. Both top 8 holdings for me.