Our little company was just highlighted in a Contrarian Outlook article:
2 Dividends Over 10% That Are Actually Secure
David Peltier, Senior Investment Analyst
Updated: August 10, 2018
When it comes to dividends, any stock yielding more than 10% these days needs to be taken with a grain of salt. That’s because bigger isn’t usually better when you’re talking about dividend yields.
The FOMC has targeted short-term rates of between 1.75% to 2.00% in the U.S. and the yield on the benchmark 10-year note is hovering around 3%. Almost any other income investment can be priced based off these rates, depending on how much extra risk you’re willing to take on.
Historically-speaking, any time a stock is paying more than seven percentage points above the AAA-rated, government-secured debt, investors begin to worry if the dividend could be cut.
However, not all dividends above 10% are too good to be true. Just two months ago, I highlighted Global Partners (GLP) and its 10.8% annual yield. The stock is up 14% since and has also increased its quarterly dividend.
As with Global Partners, the key is to find high-yielders where the company generates enough cash to cover the dividend. Along those lines, I’ve found two more stocks with double-digit yields that appear to be safe.
Secure 10% Dividend No. 1: Yield Rising for Right Reasons
AG Mortgage Investment Trust (MITT) is a real estate investment trust (REIT) that invests in residential mortgages and related instruments. The company also appears to be a rare case where its dividend yield isn’t in the double-digits because of a cratering stock price.
Excluding one-time items, AG Mortgage earned $0.55 a share in the second quarter, which was $0.03 ahead of the consensus analyst estimate. The upside was driven by lower costs. In addition, about half of the company’s investments are floating rate, so it won’t get crushed by any future rate increases like some mortgage REITs.
AG Mortgage’s profit last quarter was more than enough to cover the quarterly dividend of $0.50 a share (10.8% yield) that management actually raised in June. In addition, the company is sitting on an additional $1.57 undistributed taxable income, which is like a rainy day fund that could sustain the dividend, should future profits dip.
Secure 10% Dividend No. 2: Simplifying to Focus on Growth
NGL Energy Partners (NGL) is a diversified firm that is re-focusing efforts on its fastest growing businesses in the energy market. Back in May, the company sold its retail propane operations for $900 million.
Management is using the proceeds to pay down debt and also invest in growth opportunities within NGL Energy’s wastewater disposal and oil logistics businesses. The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 106% in the most recent quarter, with the wastewater disposal operations driving growth both organically and through acquisitions.
The stock offers a dividend of $0.39 a share (12.7% yield), which management cut back in 2016 but once again appears to be on solid ground. NGL Energy is targeting 1.3x coverage of the current payout with cash flow in fiscal 2019 (ending June).
After selling the propane business, management is also closer to its target of 70% fee-based revenue, to help limit future commodity price volatility. The re-shuffled company still has a lot to prove investors, but the outsized dividend appears safe.
