Say No To Sucker Yields: 3 Winning Dividends For Savvy Investors

seekingalpha09-09

High-yield investments can be risky, often luring investors into "sucker yields." The challenge is finding stocks that balance income and growth.Many high-yield stocks have poor returns, especially in...

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It's crucial to avoid chasing unsustainable yields.Some stocks offer strong dividends without excessive risk. These picks provide reliable income and growth, making them ideal for cautious investors.   swissmediavision Introduction As most of you may know, I have a love/hate relationship with high-yield investments. While I love to collect dividends each month and believe that dividend income is one of the best ways to retire early, some high-yield stocks make me extremely nervous. This may have something to do with the fact that I have seen so many people make horrible mistakes by buying ultra-high-yielding stocks to squeeze the most out of every dollar they invested. This includes young investors. The problem is that this comes with elevated risks that could turn into catastrophic financial decisions - yes, really. In this article, I'll explain the biggest risks and present three dividend stocks that come with both elevated income and growth, making them great investments for investors seeking income without elevated risks of generating a poor total return. I also owe this to readers, as I promised a high-yield article. So, as we have a lot to discuss, let's get right to it! Why The High-Yield Space Is A Minefield First of all, I need to give credit to my friend Brad Thomas, who defined the term \"sucker yields.\" Although \"sucker\" may not sound nice, it perfectly describes a category of very risky stocks. Brad Thomas Personally, I would even go one step further and include companies with safe dividends that come with poor business models, unable to deliver reasonable total returns for their shareholders. This brings me to a recent Wall Street Journal article titled \"When Chasing More Dividends Leaves You With Less,\" which raised a number of very important points. The article started by bringing up rate cut expectations. This is something we have discussed a lot in recent months (i.e., in this article). I have often talked about the \"cash trap,\" as investors who bought low-risk, high-yield government bonds may have to buy dividend stocks to protect their income once bond yields come down. Jason Zweig, who wrote the WSJ article, noted that ETFs that focus on dividend-paying stocks took in $4.5 billion in new money in July and August. In general, dividend stocks make sense. I would even make the case that there's nothing better than dividend stocks. Consistent dividend growers have shown above-average returns with subdued volatility. This means investors get higher returns at subdued risk, which sounds almost too good to be true. Nuveen However, there are many pitfalls. Chasing yield is one of the biggest pitfalls. Mr. Zweig brought up the Global X SuperDividend ETF (SDIV). To quote the Global X website, the ETF \"accesses 100 of the highest-dividend paying equities around the world [...].\" According to the WSJ, this includes small and medium-sized companies with yields between 6% and 20%. On a quarterly basis, it gets rid of companies that cut their dividend or have a negative outlook on their dividend. In other words, and I'm saying this with the utmost respect, these are the kind of stocks I expect someone who's chasing yield to purchase - at least some of them. Currently, this ETF yields 11%, more than nine points above the S&P 500 yield. The problem is that even including dividends, the total return has been horrible. If you had bought this ETF in August 2011 and reinvested every single penny of its jumbo-sized dividends (even excluding taxes), you would have lost roughly 11%, as we can see in the chart below. Data by YCharts Meanwhile, S&P 500 investors generated returns close to 450%! Jason Zweig hit the nail on the head when he wrote the following (emphasis added):  [...] A company that pays a steady stream of growing dividends is probably in robust financial health, but one that pays gigantic dividends is probably struggling and may be desperate to attract investors. Put a bunch of those into an ETF, and you get lots of income but even more risk. - The Wall Street Journal  I also want to add that the market is often the judge of the quality of a company. For example, the only reason why a company like Apple (AAPL) has a low dividend yield is because of its fantastic stock price performance, which has offset dividend growth. If Apple were to drop 50%, it would also pay a much higher dividend. To me, the dividend is also a valuation indicator. If a company with elevated growth and a seemingly strong business model has a \"surprisingly\" elevated yield, something may be up. Most companies with strong dividend growth and fantastic business models tend to have a low dividend yield. This may sound a bit vague, but I think you get the idea. Global X is fully aware of that. Allow me to quote the WSJ again:  Scott Helfstein, head of investment strategy at Global X, is blunt: “People are grabbing for yield at 10-15-20%, but the erosion [of net asset value] over time is considerable.” He adds: “You’re going to get your income, and you’re slowly eating away at the principal in order to get it. Investors should be paying more attention to that.” - WSJ  He's right. Especially, beginning investors should be paying a lot more attention, as there's no free lunch on Wall Street. However, there are some fantastic stocks that combine both income and growth. In the second part of this article, I'll present three of these companies, starting with the highest-yielding stock of my portfolio. 6.4% Yield: Antero Midstream (AM) Antero Midstream is my highest-yielding investment. It is a critical player in the natural gas industry. However, it produces no natural gas. As its name gives away, Antero Midstream owns midstream assets. This includes hundreds of miles of pipelines and processing assets that support the upstream operations of Antero Resources (AR) in the mighty Marcellus Basin. It is a C-Corp. It does NOT issue a K-1 form. Because Antero Midstream does not produce natural gas, it is not directly dependent on the price of natural gas, as it makes money based on long-term contracts with Antero Resources, which depends on its infrastructure. Although this also makes midstream companies poor choices for investors looking to bet on higher natural gas prices, the safety these midstream stocks bring to the table is almost unmatched in the energy sector. It also helps that Antero Resources is one of the most efficient drillers in North America. As we can see below, the company is breakeven at $2.20 Henry Hub. This allows the company to be profitable when others are losing money. This also adds to production stability, as Antero Resources can maintain its production at very low natural gas prices. Antero Midstream Hence, in the first quarter, Antero Midstream did well, growing adjusted EBITDA by 5%, lowering its net debt to 3.1x EBITDA, and acquiring new assets to expand its capacity. With regard to its balance sheet, the company's credit rating has been upgraded four times since 2020. Back then, it had a big fat junk rating of B-. Currently, its rating is BB+. While BB+ is still below the investment-grade threshold of BBB-, the leverage ratio is very healthy and the company has significantly de-risked its maturity schedule, as we can see below. Antero Midstream With regard to its dividend, Antero Midstream is a dividend cutter but not a sucker. In 2021, the company cut its dividend to free up cash for investments in growth. Although this made its dividend track record look bad, the times of dividend uncertainty are over. Data by YCharts For example, Antero Midstream has turned into a cash cow. This is what I wrote in my most recent in-depth article:  [...] this year, analysts expect the company to generate $702 million in free cash flow, potentially followed by a gradual surge to $710 million by 2026. This indicates a 2024E free cash flow yield of 11% using the company's current $6.7 billion market cap. This implies a 57% dividend payout ratio, which is extremely low for a midstream company.  Because the company is expected to reach its leverage targets in 4Q24 or 1Q25, we can expect shareholder distributions to accelerate. Given the size of its free cash flow, I expect the company to hike its dividend in the mid-single-digit range in the years ahead, supported by buybacks. This bodes very well for shareholders, as shares of the pipeline owners are very attractively valued at current prices. The stock trades at a blended P/OCF (operating cash flow) ratio of 8.2x, which is below its long-term average of 10.4x. Although it will take a while for AM to reach that valuation, I expect the stock to gradually move to $19, especially if the Fed starts to cut rates, causing a rotation to high-quality dividend stocks. This would imply a 33% upside, excluding its dividend. FAST Graphs Hence, while AM shares are currently a bit pressured by deteriorating market sentiment, I am adding more shares on weakness, as I believe we're dealing with a stock capable of elevated long-term returns. I also need to add that the pre-pandemic stock price volatility is unlikely to be repeated. Back then, most midstream companies did not generate free cash flow due to elevated capital spending. Now, they benefit from capital spending in the past and have much more favorable free cash flow profiles. This also explains why I cannot stop discussing this industry on Seeking Alpha. 5.1% Yield - Realty Income (O) Is Realty Income a sucker yield? Over the past ten years, the largest net lease REIT in the world has returned 126%, lagging the S&P 500's 221% return by a substantial margin. Data by YCharts Yet, Realty Income is not a sucker yield. The chart below compares the ratio between Realty Income's stock price (including dividends) and the S&P 500 (the black line) to the inverted yield on the ten-year U.S. government bond. As we can see, the moment rates started to bottom, Realty Income underperformed the S&P 500 because investors found value in other areas. Now, as we are likely looking at a peak in rates, Realty Income is more likely to outperform the market again. TradingView (O/SPY, U.S. 10Y Yield - Inverted) Moreover, while there are certainly more exciting places to invest than Realty Income, it brings a lot of safety and reliability to the table, characteristics that make it a perfect investment for conservative investors. For example, the largest net lease REIT in the world has a 5.1% dividend yield. This is protected by an A-rated balance sheet and comes with 29 consecutive years of dividend growth (4.3% CAGR). Realty Income The dividend is paid monthly, which some investors may prefer over quarterly payments. It also helps that the company's tenant base is extremely safe, with major exposure in anti-cyclical areas like convenience and grocery stores. Although Walgreens is having some issues, the risks of weakening tenants are subdued, which should bode well for rent collection. Realty Income Furthermore, since 1994, the company has returned 13.4% per year with a beta of 0.5, indicating a very favorable volatility profile - especially compared to other S&P 500 REITs, as we can see below. Realty Income Going forward, the company is expected to grow by exploiting a multi-trillion net lease market in the U.S. through sale-leaseback operations and secular growth in data centers and gaming - this includes the company's acquisition of ownership of Bellagio in Las Vegas. Realty Income Sale-leaseback operations are deals where a company sells its building to a landlord. This allows companies to improve liquidity without having to go to a bank for an expensive loan. Realty Income The valuation isn't bad, either. Although Realty Income shares have bounced back from recent lows, I still expect >11% annual returns based on 3-5% annual per-share AFFO (adjusted funds from operations) growth, its 5.1% yield, and its discount to its longer-term AFFO multiple. FAST Graphs The next stock yields more than 8%. 8.3% Yield - MPLX LP (MPLX) I just spent more than an hour working my way through my high-yield lists in Excel and decided to include two midstream companies in this article. There's just too much value in this segment. However, in this case, MPLX is not a C-Corp. Unlike Antero Midstream, MPLX is a Master Limited Partnership (\"MLP\"), which issues a K-1 instead of a 1099. Some prefer it that way. Others don't. Personally, as a non-American, I have a hard time accessing MLPs, which is why I refrain from buying them - unfortunately. Anyway, what Antero Midstream is to Antero Resources, MPLX is to Marathon Petroleum (MPC), one of North America's most efficient refineries. MPC owns roughly 65% of MPLX and accounts for roughly half of its revenues, which are generated in the Logistics & Storage and Gathering & Processing segments. MPLX LP Because of America's booming natural gas and oil production, demand for major pipeline systems is rising, which is why MPLX benefits more than Antero Midstream, which is mainly focused on Antero Resources and smaller bolt-on acquisitions. In the second quarter of this year, the company grew its EBITDA by 8% and its distributable cash flow by 7%. This resulted in a distribution coverage ratio of 1.6x, indicating the dividend (called \"distributions\") is well covered.   MPLX LP Currently yielding more than 8.0%, the distribution was hiked by 9.7% on October 24, 2023, and 9.9% in November 2022. These are fantastic growth rates in light of the juicy yield. Data by YCharts Investors are also protected by a fantastic balance sheet with a 3.4x leverage ratio and a consistent growth history since the pandemic (when the midstream industry became much stronger). MPLX LP Going forward, MPLX is expected to sustain consistent growth due to major projects like the Blackcomb pipeline, which connects the Permian Basin to domestic and export markets along the Gulf Coast. MPLX LP The company also expanded its ownership of the BANGL NGL pipeline to 45%. This pipeline shipping natural gas liquids is one of many projects with significant secular growth due to increasing NGL production in major basins like the Permian. Global Energy Monitor (BANGL Pipeline) Valuation-wise, the company trades at a blended P/OCF ratio of 7.6x, roughly 0.5 points below its longer-term average. Although I believe the company deserves a higher multiple, even using an 8.1x average implies a fair unit price of $55, 30% above the current price. FAST Graphs When adding its juicy distribution yield, I believe MPLX is a great place to be for income investors who do not mind (or even prefer) K-1s. Takeaway High-yield investments can be a double-edged sword. While the allure of juicy dividends is undeniable, the risks associated with chasing high yields are often overlooked, especially by newer/inexperienced investors. The key is finding a balance between income and growth, which is why I've highlighted three stocks: Antero Midstream, Realty Income, and MPLX. These companies offer attractive yields without sacrificing stability or potential for long-term growth.  As always, it's crucial to prioritize quality and sustainability in dividend stocks over sheer yield, especially in a market where chasing elevated income can quickly turn into very poor financial decisions.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2466198460"}