The following is guest post by Samuel Smith for Sure Dividend. I’m a big fan of Sure Dividend and buying great dividend stocks are one of the very few areas where I think there is true value in going with individual companies rather than your typical S&P 500 or Total Market fund.
Investing in high yielding stocks can accelerate your passive income snowball. Instead of having to wait a long time for your lower-yielding dividend growth stocks to reach an impressive yield on cost, you can simply buy a higher yielding stock and get that yield immediately. The math on this is pretty simple: if you buy a 3.25% yielding stock with an 8% dividend growth rate, it will take you a whopping 10 years to reach a 7% yield on cost. If you instead purchase a 7%-yielding stock today, you can literally retire 10 years earlier with the same passive income stream.
That said, while high yield is better than low yield all else being equal, it can be tricky investing in high yielding stocks. That is because oftentimes stocks offer high dividend yields for a good reason, such as a risky balance sheet, business model, or a dividend payout. As a result, recklessly buying stocks for their yields without looking under the hood first can lead to painful dividend cuts down the road that will ruin your retirement dreams. In this article, we discuss three high-yielding stocks that pay out an average current dividend yield of 7.25% that we believe is sustainable over the long-term.
#1. Antero Midstream (AM)
AM is a midstream business that is paying out a very attractive dividend that currently yields a whopping 8.5%. Even better is the fact that we expect this dividend to be very sustainable for the long-haul for the following reasons.
First, the dividend is expected to be covered 1.69x by distributable cash flow in 2023. Second, distributable cash flow per share is expected to increase moving forward due to a combination of interest expense reduction and organic growth. Third, AM has a multi-decade production profile underpinning its assets which themselves generate stable cash flows from fixed-fee commodity price resistant contracts, giving the company a stable cash flow profile for many years to come. Fourth, AM has no debt maturing before 2026 and management is currently focused on aggressively deleveraging the balance sheet with its substantial free cash flow net of dividends, which will further de-risk the company and make it even less likely that they would ever have to cut the dividend.
Likely sometime in 2024 management expects to achieve its long-term leverage target of 3.0x. Once this happens, they expect to look at beginning to increase their dividend and/or share repurchases. Regardless if/when they decide to grow their dividend, AM’s current dividend yield is more than sufficient to make up for a lack of dividend growth and its dividend appears to have a very low risk of being cut anytime soon.
#2. TC Energy (TRP)
TRP is a very reliable dividend growth stock with 22 years of consecutive dividend per share growth. On top of that, it currently offers a very attractive 6.6% dividend yield that we expect to continue growing each year for the long haul for several reasons.
First of all, it generates very stable cash flows from its utility-like midstream and energy generation assets which are considered world-class and have lengthy, fixed-fee contracts attached to them. Second, its payout ratio is remarkably low at just 53% anticipated for 2023. Third, its substantial multi-billion dollar growth pipeline should drive solid growth for the foreseeable future (in the mid-single digits according to management guidance). Fourth, its balance sheet is in sound shape as evidenced by its BBB+ credit rating and 20 year average term to maturity on its debt.
With such strength in its underlying cash flows, the solid balance sheet positioning, the strong growth momentum for the dividend and business, and the very attractive and well-covered current dividend payout, TRP looks like one of the most appealing risk-adjusted high yield investment opportunities in the market today.
#3. New York Community Bancorp (NYCB)
NYCB is a banking company that recently completed a merger of New York Community Bank and Flagstar Bank. This combination is expected to give them significant synergies and new competitive advantages, including a greater branch and ATM network, expanded product offerings, and an improved funding profile to mitigate some of its interest rate risk. With a 6.75% current dividend yield, NYCB is not only an attractive high yield stock but it should also prove to be a very reliable dividend payer for years to come.
The first reason for this is that NYCB’s business model is quite low risk with very strong underwriting performance. As of the end of fiscal 2022, non-performing loans stood at a mere 0.2% of total loans. This is largely because they have conservative loans to value levels (~60%) on their loans and their loans are generally backed by very stable – including recession-resistant rent-controlled – multifamily properties in New York City.
Second, NYCB’s efficiency ratio of 38.75% compares very favorably to its peer group’s efficiency ratio of 48.39%, indicating that it is a well-run bank and generates high profit margins. This should enable them to better support their dividend through leaner periods.
Third, its payout ratio is quite conservative. The company earned $1.23 in adjusted earnings per share in 2022 while paying out a dividend of $0.68. This means that their payout ratio is just 55%. Moving forward, this payout ratio should move even lower given that the merger with Flagstar is expected to be accretive to earnings per share. On a recent earnings call, management made it very clear that they remain firmly committed to the dividend, stating:
“we’ve had a long history here of a very strong dividend…We are very comfortable with asset quality. We’re very comfortable with how we look at our capital deployment. And going forward, we feel very strongly that we’ll continue to pay a very strong dividend. And obviously, this has been a history and culture of the company going back for decades. So ,we’re very confident.“
Finding high yielding stocks whose payouts are safe for the long haul can be challenging. However, given the ability of high yielding stocks to accelerate and enrich one’s retirement, finding them can definitely be a highly rewarding undertaking. With stocks like AM, TRP, and NYCB, retirees should be able to sleep well at night with lucrative income streams that should be dependable for years to come.
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