Buy Alert: 3 Safe 10-12% Yields That Just Hiked Their Dividends

Seeking Alpha2023-03-21

SummaryThanks to the recent high yield sector sell-off, there are several highly compelling opportunities available that offer attractive combinations of yield and growth.We are diligently sifting the...

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Comments

klarky
2023-03-21
klarky
Nice
Limhockmeng
2023-03-21
Limhockmeng
Wow
hellodarz888
2023-03-21
hellodarz888
Rare
Titis
2023-03-21
Titis
Thks

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While the entire market has been in a downturn over the past month and a half, the chart below illustrates that the higher yielding portions of the market have been hit the hardest as evidenced by the sharp declines in REITs (VNQ), high yield stocks (DIV), energy (XLE), and dividend growth stocks (SCHD). Meanwhile, tech (QQQ) and the mega cap tech heavy S&P 500 (SPY) have gotten hurt relatively less over that span:Data by YChartsAs a result of the sharp sell-off in the high yield sector, we are diligently sifting the potential big winners from the riskiest high yielders at High Yield Investor.In this article we discuss three stocks that offer safe 10%, 11%, and 12% dividend yields that recently hiked their dividends and possess attractive growth potential that we think are attractive buys today after the recent sell-off:Data by YChartsAs the saying goes:The safest dividend is the one that has just been raised.#1. Energy Transfer (ET) - 10.2% YieldET aggressively grew its distribution last year, bringing it back up to its pre-COVID-19 level of $1.22 per unit per year:Data by YChartsMoving forward, there are four reasons why we remain bullish not only on ET's distribution safety but also likely further growth:First, as a midstream infrastructure business, ET enjoys significant cash flow stability with only about 10% of its adjusted EBITDA impacted by commodity price volatility.Second, the balance sheet is in excellent shape, with an investment grade credit rating and the possibility of a credit rating upgrade in the not-too-distant future thanks to management paying down billions of dollars in debt over the past few years, with more debt reduction prioritized for 2023.Third, the distribution is covered by over 2x based on projected 2023 distributable cash flow per unit and by over 1.6x based on projected 2023 free cash flow. As a result, it is exceptionally well-positioned to weather any negative impacts from energy price or macroeconomic volatility.Fourth, ET continues to invest aggressively in growth projects and its strong position in the NGL export space positions it to enjoy growth in the coming years.When you combine the hefty distribution coverage with continued balance sheet strengthening and the potential for continued per unit DCF growth, ET appears highly likely to not only sustain its double-digit yield but grow it for years to come.#2. Ares Capital (ARCC) - 11.0% YieldARCC is a business development company (i.e., BDC) that primarily invests in senior secured loans to middle market businesses, though it also invests in other forms of loans, preferred equity, and common equity.It has a tremendous track record of generating long-term alpha and sustainable income for shareholders:Data by YChartsMeanwhile, the dividend looks very safe at the moment for the following reasons:First of all, Net Investment Income for the company increased by 30.8% YoY and 19.3% sequentially in its most recent quarter. The dividend coverage is strong at 1.42x, which is unusual for a BDC that must pay out at least 90% of taxable income as dividends. Furthermore, its spillover income remains over 2.5x its current regular quarterly dividend rate, providing a cushion to support the dividend even during a recession.Second, while the main risk is that the company's earnings profile could be impacted by a significant further increase in interest rates as it could cause counterparties to default, we think this is an improbable scenario. In addition to projections for further Federal Reserve hikes moderating in the wake of recent market chaos, management is being conservative with the dividend and has left significant coverage of current earnings and spillover income in case of a negative scenario. ARCC's exceptional underwriting track record gives us further confidence here.Third, the investment portfolio's increasing quality is another reason to have confidence in the safety of the dividend. Notably, ARCC's counterparty's average size saw significant improvement in 2022, particularly in Q4. The non accrual rate was only 1.7% of cost as of year-end, well below its 10-year average of 2.4%. On the earnings call, management highlighted:At year-end 2022, the weighted average EBITDA of our portfolio companies reached $275 million, an increase from $162 million at the end of 2021 and meaningfully above the weighted average from 5 years ago of $62 million. We believe this offers significant benefits to Ares Capital as we grow as larger companies generally have stronger credit profiles as a result of more diverse revenue streams, broader customer bases and more experienced management teams.Given management's aggressive dividend growth last year, its long-term track record of strategically issuing equity at premiums to NAV, significant spillover income cushion, and its skill at balancing conservativism with growth investing, ARCC's dividend appears poised for further growth in the years to come.Data by YCharts#3. OneMain Holdings (OMF) - 11.8% YieldOneMain Holdings is a financial services holding company that operates in the US. The company provides personal loans secured by collateral such as automobiles as well as unsecured loans, credit cards, and various insurance products such as life, disability, involuntary unemployment insurance, and asset protection coverage.With a dividend near 12%, OMF immediately jumps off the page as a very attractive-looking high yield stock. That said, many investors may be scared off since such high yields often indicate that the dividend may be at risk. While this is a fair point, the dividend appears to be quite safe at OMF for the following reasons:First and foremost, the company just recently hiked its dividend by 5.3% in February, indicating that management is quite bullish on the sustainability of its dividend moving forward.Second, management recently doubled down on its commitment to the dividend at the 24th Annual Financial Services Forum, stating:We have a very robust dividend that people can count on regularly...We just increased it even in a year where we put out our strategic priorities or guidance where we're going to make a little less this year than we did last year, just the math of this, and we think we'll bounce right back. We've got plenty of coverage even in a severe economic stress. And so I mean, I think what you should take from our increase in dividend is even if things get a lot worse, we feel very comfortable that our dividend is sacrosanct, and we can return this kind of capital to investors...[we have] a steady dividend that will likely increase over time.Third, the dividend is currently well covered by earnings. Despite management growing the dividend by 5.3% and forecasting this year to be a bit of a trough year in earnings as it continues to invest in growing its credit card business while also recalibrating its loan portfolio to adjusted from shifting from the lucrative COVID-19 stimulus environment to one in which write-offs are a bit elevated, the dividend payout ratio is still expected to come in at a conservative 62%. Write-offs would have to soar to levels not seen since the Great Financial Crisis and Great Recession before the company would begin turning a loss.Fourth, OMF has strong growth potential ahead of it. In addition to taking some market share from competitors with weaker balance sheets and underwriting capabilities, OMF is rolling out a credit card business that is growing rapidly and will likely continue to grow for the foreseeable future. On top of that, it is buying back shares hand-over-fist, driving strong per-share accretion. As a result, analysts forecast that earnings per share will grow at a 5.3% CAGR through 2025.Investor TakeawayThe opportunity to buy safe double-digit yields that have strong growth momentum underpinning them along with the potential to grow for years to come is rare. However, thanks to the market throwing the baby out with the bathwater in recent weeks, investors can do exactly that.At High Yield Investor we arebuying stocks likeET, ARCC, OMF, and several others like them hand-over-fist and expect to be richly reward with a combination of substantial income and total return outperformance for years to come as a result.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":9943874038,"gmtCreate":1679379745125,"gmtModify":1679379748827,"author":{"id":"4126097619390902","authorId":"4126097619390902","name":"klarky","avatar":"https://community-static.tradeup.com/news/440ae307ae3a7b5cc1f7c25d579801d8","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":4,"crmLevelSwitch":1},"htmlText":"Nice","listText":"Nice","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943874038","repostId":1101906052,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943862445,"gmtCreate":1679359305788,"gmtModify":1679359309433,"author":{"id":"3581900198517383","authorId":"3581900198517383","name":"Limhockmeng","avatar":"https://static.tigerbbs.com/547b3a4e05afddc292cc1e75be64e63f","vip":1,"crmLevel":4,"crmLevelSwitch":0},"htmlText":"Wow&nbsp;","listText":"Wow&nbsp;","text":"Wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":7,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943862445","repostId":1101906052,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943868266,"gmtCreate":1679358364156,"gmtModify":1679358367916,"author":{"id":"3583033675115574","authorId":"3583033675115574","name":"hellodarz888","avatar":"https://static.tigerbbs.com/4e5f7fa39ea3c821aa8099f517287dcb","vip":1,"crmLevel":8,"crmLevelSwitch":1},"htmlText":"Rare","listText":"Rare","text":"Rare","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":7,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943868266","repostId":1101906052,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943861608,"gmtCreate":1679357294504,"gmtModify":1679357297946,"author":{"id":"4097390762131420","authorId":"4097390762131420","name":"Titis","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":5,"crmLevelSwitch":0},"htmlText":"Thks&nbsp;","listText":"Thks&nbsp;","text":"Thks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":8,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943861608","repostId":1101906052,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":83,"commentSize":0,"repostSize":1,"favoriteSize":4,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1101906052"}