I'm Buying Up To 11% Yield For Recurring Income

seekingalpha07-02

While the market is focused on a handful of tech stocks, I'm seeing opportunities in value stocks with high dividend yields.Kinder Morgan, a midstream energy giant, has stable cash flows, and strong ...

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Vivek Vishwakarma Investing in today’s market can often feel like a popularity contest, with headline-making stocks like Apple (AAPL), Meta Platforms (META), and Nvidia (NVDA) garnering a lot of attention and interest both online and in conversations with friends, relatives, and colleagues. What I like about the market is that with so many choices to choose from, it doesn’t have to be a popularity contest, and it's often the less discussed stocks today that have the potential to be tomorrow’s winners. That’s because besides having a more appealing valuation, less popular stocks can also come with a far higher dividend yield and add much needed diversification to one’s portfolio. That’s especially true in today’s market, considering that the S&P 500 (SPY) is now well-over 30% weighted toward technology stocks, which means that simply adding a couple non-tech stocks to an indexed portfolio can greatly reduce concentration risk. This brings me to the following 2 picks, which offer yields ranging from 6-11%. In this article, I discuss why each of them make sense at their current price for value and high dividend income, so let’s get started! #1: Kinder Morgan Kinder Morgan, Inc. (KMI) is an energy giant in the midstream industry. I last covered KMI in April, highlighting its strong track record of value creation and discounted valuation. While KMI hasn’t generated the types of attention-grabbing headlines as the tech-driven rally, its 7.5% rise in price (9.2% total return including dividends) has beaten the 4.8% rise in the S&P 500 over the same timeframe, showing that picking value in less-followed corners of the market can pay off for investors. KMI has the largest natural gas transmission network in the U.S., including 70K miles of gas pipelines, moving 40% of gas production in the country. It also has a sizable 700+ bcf of working storage capacity, which is enough to hold 15% of total natural gas capacity in the U.S. and has a network of refined products and crude pipelines along with independent storage terminals. The midstream segment is a poster child for recurring income streams, and KMI is no different. This is considering the fact that 89% of its cash flows are contracted, giving it cash flow stability and shielding it from commodity price risk. As shown below, just 12% of KMI’s cash flows are tied to gathering and production and 64% stems from natural gas. Investor Presentation This has enabled steady shareholder returns, with $20.3 billion in capital returned to shareholders since 2016, including $1.3 billion worth of share repurchases and the rest being dividends. Over the same time frame, it’s grown adjusted EPS at an 8% CAGR all while decreasing its leverage from 5.3x to 3.9x (budgeted for 2024) over the past 8 years, as shown below. Investor Presentation KMI has continued to demonstrate cash flow resilience and growth, with distributable cash flow per share and EBITDA growing by 5% and 7% YoY, respectively. This was driven by growth in natural gas transport volumes of 2% YOY and robust 17% growth in gas gathering volumes over the prior year period. The outlook for the U.S. energy industry remains bright, especially considering the demands being placed on the energy grid by AI now and into the future. According to Wells Fargo (WFC), electricity demand is expected to grow 20% by the end of this decade. In the same analysis, Wells Fargo believes that renewables may struggle to fill the gap on its own, with natural gas planning for a spike in demand over the next decade. As shown below, U.S. natural gas demand is projected to grow by another 20 bcfd by the end of 2030, with additional upside potential from power demand, after having grown by 30 bcfd since 2015. Investor Presentation KMI is well-positioned to meet this demand as its assets are strategically placed in the Bakken (North Dakota), Permian (Texas), and Utica/Marcellus (Appalachia) shale producing regions of the U.S., and expects to increase supply by 18 bcfd by 2030. In the near-term, management is guiding for 8% growth in both adjusted EBITDA and DCF per share for 2024, and for net debt to EBITDA to reach 3.9x by the end of this year, a decline of 0.3x from the end of last year. This includes contributions from both organic growth and external growth of a $3.3 billion capital project backlog, 40% of which is expected to be in service this year. This includes midstream projects in natural gas, refined products, and energy transition such as renewable natural gas facilities. Meanwhile, KMI sports a well-covered 5.8% dividend yield with a payout ratio of just 51% based on the $2.26 DCF per share guidance for 2024. The dividend has also grown at a respectable 6% CAGR over the past 5 years. Turning to valuation, KMI remains attractively valued at the current price of $19.87 with a Price-to-Cash Flow of 6.95x. As shown below, KMI is priced higher than Energy Transfer (ET), but is cheaper than peers Enterprise Products Partners (EPD), MPLX LP (MPLX), Williams Companies (WMB), and ONEOK (OKE). KMI vs Peers' P/CF (Seeking Alpha) As shown below, KMI is also priced within the boundaries of its valuation range between 6x and 9x over the past 3 years. KMI P/CF 3-Yr Trend (Seeking Alpha) With a near-6% dividend yield, and strong forward outlook, I would expect for KMI to be able to produce at least mid-single digit DCF per share growth annually over the medium term, which could result in market-beating total returns from this undervalued energy giant with economically essential assets. #2: Golub Capital BDC Golub Capital (GBDC) is an externally managed BDC with a long track record of producing solid investor returns, primarily through its dividend. That’s because as a BDC, it’s required to distribute at least 90% of its taxable income to investors. I last covered GBDC in April, remarking its diversified and conservatively run portfolio and attractive valuation compared to peers. It appears the market hasn’t yet agreed with the thesis, as the stock has declined by 5% since then (-2.7% total return including dividends). Despite what the share price performance might suggest, GBDC is actually producing strong results, not least of which includes NAV per share rising by $0.09 from when I last covered the stock to $15.12 at the end of fiscal Q2 2024 (ended 3/31/24). As shown below, GBDC’s NAV per share continues to recover from the write-downs in valuations starting in March 2022 due to lower mark-to-market values in a rising rate environment. GBDC P/Book 3-Yr Trend (Seeking Alpha) Moreover, NII per share rose by $0.02 on a sequential QoQ basis to $0.51. This results in a strong regular dividend coverage ratio of 131%, enabling GBDC to declare special dividends. GBDC has declared 4 special dividends for the remainder of the year, totaling $0.21 per share, since declaring a regular dividend in May. The total regular plus special dividends this year amounts to $1.79, equating to an 11.4% dividend yield based on the current price of $15.71. Seeking Alpha GBDC’s investment profile remains conservatively managed, with 85% of the portfolio being first-lien debt investments as of fiscal Q2, 2024, sitting just 1 percentage point lower from the prior year period. The portfolio is also well diversified, with a mix of high-growth industries like software and defensive industries like healthcare, as shown below. Investor Presentation GBDC is well-positioned to benefit from higher rates, as 99% of its income-producing portfolio is floating rate. As shown below, GBDC continues to enjoy a healthy investment spread of 7.3% between yield on investments and its cost of debt. This sits a full 280 basis points higher than Q2 2022 when interest rates started to rise. Investor Presentation I see GBDC has having a positive outlook based on its upcoming merger with Golub Capital BDC 3, a privately run income vehicle. As part of this agreement, GBDC’s external advisor reduced its capital gain incentive fee from 20% to 15%, and in another shareholder-friendly move, permanently reduced the base management fee to 1%, from 1.375% previously. This sits a full 50 basis points below the 1.5% base fee that Ares Management (ARES) charges Ares Capital (ARCC) for being its external advisor. Meanwhile, GBDC maintains a strong balance sheet with a BBB- investment grade credit rating and a debt to equity ratio of 1.15x, sitting safely below the 2.0x statutory limit for BDC. It also has ample dry powder to fund opportunistic investments, with $1.9 billion in total liquidity. Lastly, I find GBDC to be attractive at the present price of $15.71, equating to a Price-to-NAV ratio of 1.04x, sitting in between of that of large peers Ares Capital’s 1.07x and Blue Owl Capital’s (OBDC) 0.99x, as shown below. GBDC vs. Peers P/Book (Seeking Alpha) As such, I find GBDC to be a solid \"buy\" considering its longer track record than OBDC and better expense ratio than ARCC. With an 11.4% total dividend yield including specials, GBDC could produce market-beating returns over the next 12 months with potential for NAV per share growth as a bonus kicker. Investor Takeaway In today's market, investors often focus on popular tech stocks, but undervalued and less-talked-about stocks like Kinder Morgan and Golub Capital present great opportunities in their own right for their quality and high-income potential. KMI, a midstream energy giant, benefits from its extensive natural gas infrastructure and stable, contracted cash flows, while GBDC, an externally managed BDC, maintains a diversified, conservatively managed portfolio with a strong focus on first-lien debt investments.  Their strong fundamentals, appealing valuations, and potential for market-beating returns make them attractive options for diversifying portfolios and reducing concentration risk in today's tech-heavy market.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"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":"4.24.2","shortVersion":"4.24.2","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/2448575841"}