It can be tough for income-seeking investors to find a decent high-yield investment these days that doesn't also come with a high level of risk. That's because most low-risk bank products offer paltry payouts thanks to low-interest rates while many stocks aren't much better given the market's elevated valuation. In fact, at just 1.9%, the yield of the S&P 500 is less than half its historical median average.
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That said, just because it's harder to find high-yield options doesn't mean they don't exist. You just need to dig a little deeper to find them. That's just what we did, and we believe we've uncovered three gems in Enviva Partners (NYSE: EVA), Garmin (NASDAQ: GRMN), and ONEOK (NYSE: OKE).
The biggest energy dividend you've never heard of
Brian Stoffel (Enviva Partners LP): I'm not an income investor, so you won't often find me chasing after dividend yields. That being said, I'm a big fan of Enviva Partners and plan on adding shares of the company to my portfolio within the next month.
The company has found an underappreciated niche: providing wood pellets to power plants -- primarily in Northern Europe but with the potential to spread to Southeast Asia -- as a "renewable" energy source. In essence, this is a bridge input: helping to lower greenhouse gas emissions while treading water and waiting for solar and wind power to become more mainstream.
But don't let that scare you away: Enviva has long-term contracts in place with its customers, the average length of which was 9.8 years as of the most recent quarter. That means that while this might not be a buy-and-hold-forever stock, some careful diligence could help you make the most out of it.
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And did I mention that the company currently offers an 8.1% dividend yield based on its expected 2017 payout? In the most recent quarter, all distributable cash flow was eaten up by the dividend, which isn't a good sign. But management claims this was because plants were not at full capacity while they were updated to tighten the standards of their pellets to match Europe's desires. If true, the dividend should continue appreciating, and investors should keep raking in lots of cash from this high-yield stock.
Unloved dividend-paying king
Tim Brugger (Garmin): According to some, Garmin's surprisingly strong second-quarter earnings release was more of an anomaly than a precursor of what investors can expect going forward, which is great news for value seekers in search of high-yield stocks. Why? Because Garmin and its 4% dividend payout is, by virtually every metric, one of the least expensive stocks in its peer group.
Being underappreciated by the Street is nothing new for Garmin. Of the past 10 quarters, Garmin has pleasantly surprised pundits -- as it did last quarter -- seven times. The $0.88 adjusted earnings per share (EPS) Garmin posted handily beat the $0.81 a share estimates, and its 1% increase in revenue to $817 million was topped off by a slight bump in guidance for this quarter.
Some have lamented the sharp decline in Garmin's auto and fitness categories, both of which declined 15% year over year. However, the 46% jump in Garmin's outdoor division to $194.8 million and the 15% increase in aviation sales to $124 million more than picked up the slack. And with the recent approval by European authorities of Garmin's new commercial aviation system, the G1000 Nxi, now complete, the unit should continue to thrive.
Thanks to sound expense management -- the slight increase to $274.5 million spent was due almost entirely to a bump in research and development costs -- gross margin rose 1.5% to 58.5%. Garmin may not have won the hearts of pundits, but for dividend-hungry investors, it offers both a high yield and growth potential for August and beyond.
One down and more on the way
Matt DiLallo (ONEOK): Natural gas pipeline and processing company ONEOK promised investors that it would boost its already compelling dividend by 21% after completing the acquisition of its master limited partnership. The company made good on that promise last month and now yields an even more generous 5.9%, which is higher than it would have been if it weren't for the fact that the stock has inexplicably fallen 11.5% this year despite doing everything it said it would do.
That said, there's an even bigger payday waiting in the wings since ONEOK believes it can increase its dividend by a 9% to 11% annual rate from 2018 through 2021. Fueling that rapid growth rate are a slew of high-return, fee-based projects in development, which should steadily boost cash flow. During the last few months alone, the company has secured $330 million of growth projects, which should enter service over the next couple of years. There's also minimal funding risk since it recently refinanced some upcoming maturities and shored up its balance sheet, ending the quarter with $332.4 million in cash. Meanwhile, ONEOK expects that its go-forward dividend coverage ratio will remain above 1.2 times, meaning that it should generate excess cash to help finance future projects and further improve its balance sheet.
Given its progress this year, and what's in store for the company over the next several years, ONEOK looks like a great high-yield stock to own for the long term. Furthermore, investors who buy this month can lock in an excellent starting yield given the recent increase and the gift sell-off in its stock price this year.
10 stocks we like better than Garmin
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Brian Stoffel has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool has a disclosure policy.