6 High-Yield Dividend Stocks, and Why Only 3 Are Worth Owning

By Markets Fool.com


Source: Dynagas LNG Partners.

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The stock market can be volatile at times, especially with high-yield LNG tanker stocks such as GasLog (NYSE: GLOG) and Golar LNG (NASDAQ: GLNG); their respective MLPs, GasLog Partners (NYSE: GLOP), Golar LNG Partners (NASDAQ: GMLP); and two other LNG MLPs, Dynagas LNG Partners (NYSE: DLNG) and Teekay LNG Partners (NYSE: TGP).

GLOG Total Return Price data by YCharts

Naturally, it can be difficult for dividend investors to determine whether any or all of these recent price fluctuations are justified. Even harder is determining which of these LNG tanker stocks, if any, are likely to make good long-term investments. However, such a task is not impossible. As we shall soon see, there are several reasons why half of these six are currently worth owning.

The business model doesn't really justify the recent share rally ...
At first glance, the recent rally in LNG tanker stocks makes little sense. After all, other than Golar LNG, which has65% of its fleet operating in the short-term spot market, all of these stocks derive their cash flows from long-term, fixed-fee contracts that have to do with the transportation of natural gas. Thus, a rally in oil prices wouldn't seem to benefit them much, if at all. However, this isn't necessarily true.

For one thing, low oil prices have had oil companies slashing expenses, and LNG export projects are immensely costly and take many years to bring online. Thus, it's possible that cash flow-desperate oil companies may end up cancelling LNG export projects out of necessity, potentially reducing demand for LNG tankers.

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Source: Rystad Energy

In addition, many LNG contractsinmajor LNG import markets--Asia andEurope -- are linked to oil prices. Ascrude prices have collapsed, the price advantage of importing U.S. natural gas has plummeted as well.

US Natural Gas Imports Price data by YCharts

... but here's whythat doesn't necessarily matter
One of the main reasons to invest in LNG tanker stocksis sustainable, generous, dividend income today with strong payout growth potential in the future.By those measures, half of thesestocks could prove to be excellent dividend growthinvestments over the coming decade:

Company or MLP Yield Q4 2015 Payout Coverage Ratio 5-Year Expected Annual Growth Rate
GasLog 4.6% 1.33 14.5%
Golar LNG 1.2% N/A 3.7%
GasLog Partners 11%

1.43

10% to 15%
Golar LNG Partners 14.3% 1.39 5.8%
Dynagas LNG Partners 13% 1.16 0.9%
Teekay LNG Partners 4.2% 5.5 4.3%

Sources: Yahoo! Finance, Fastgraphs, Morningstar,company 10-Ks, management guidance.

Note that Golar LNG generated negative free cash flow, as well as a large GAAP loss inits latest quarter. It also slashed its dividend 89% this quarter. It's suffering from heavy exposure to short-term tanker pricing, which has been depressed over the past few years because of vessel oversupply.

Meanwhile, Teekay LNG Partners recently cut its distribution 80%, which explains the sky-high distribution coverage ratio. The cut was necessarybecause ofits heavy debt load andthe large amount of contracted expenses it has coming due over the next few years, mostly new tanker construction.

Finally, remember to be skeptical of payout growth projections, since they're only estimates, whether coming from management or analysts. Dividend investors should prioritize long-term sustainability of a payout -- which requiresa solid distribution coverage ratio.

GasLog, GasLog Partners, Golar LNG Partners, and Dynagas LNG Partners all seem to have reasonably secure payouts for the time being. While this situation makes short-term distribution cuts less likely, it doesn't necessarily guarantee their current dividend payemtns. That's because payout sustainability can be wrecked by an over-leveragedbalance sheet.

Risks to consider

Company or MLP Total Debt Debt/EBITDA (Leverage) Ratio Contractual Obligations Through Next 2-3 Years
GasLog $2.38 billion 9.9 $1.57 billion
Golar LNG $1.82 billion NA $1.03 billion
GasLog Partners $742 million 5.3 $84 million
Golar LNG Partners $1.052 billion 3.3 $452 million
Dynagas LNG Partners $575 million 5.2 $131 million
Teekay LNG Partners $1.924 billion 6.0 $1.75 billion

Sources: Morningstar, company 10-Ks.

The LNG Tanker business is a capital intensive one, so a great deal of debt is to be expected. However, GasLog has an enormous leverage ratio, as well as nearly $1.5 billion in obligations coming due relatively soon. This makes me skeptical of the long-term sustainability of its dividend, despite its recent move to refinance all debt maturing between now and FY2017.

Teekay LNG Partners has a similar problem -- high debt and huge obligations on its distributable cash flow.

Meanwhile, GasLog Partners and Dynagas LNG Partners also have relatively high leverage ratios -- rating agencies usually like to see no higher than 4.5 -- but their ratios are still probably small enough to prove manageable. In addition,their small short-term capital obligationsmean that, shouldenergyprices not recover by2018, neither would, most likely, have totake on additional debt.

Bottom line
It seems increasingly likely that we are on the cusp of increasedLNG trade growth over the coming decades. However, dividend investors wanting to cash in on this trend need to be careful thattheirLNG tanker stocks allhave long-term contracts, well-covered payouts, and manageable debt and short-term capital obligations.

Possessingall three characteristics,Golar LNG Partners, GasLog Partners, and Dynagas LNG Partners, represent the best long-term income opportunities in this industry.

The article 6 High-Yield Dividend Stocks, and Why Only 3 Are Worth Owning originally appeared on Fool.com.

Adam Galas owns units of Dynagas LNG Partners. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.