High-yielding dividend stocks can be a great cash flow generator for investors or a sign of trouble. Really high dividends are usually a sign that investors don't think a dividend will last, so diving into high yields can be a dangerous place in the market.
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We asked three of our investors for some high dividends that do have long-lasting dividends and National Retail Properties (NYSE: NNN), Magellan Midstream Partners (NYSE: MMP), and Brookfield Renewable Partners (NYSE: BEP) were the stocks that made the cut.
A rock-solid REIT
Brian Feroldi (National Retail Properties): The recent retail downturn has caused investors to flee from all kinds of companies that have exposure to the industry. That includes REITs such as National Retail Properties, which makes sense given that company's 2,500 properties are exclusively leased out to retail concepts. The selling pressure has pushed up National's dividend yield to 4.8%, which I consider to be a very attractive yield.
Of course, a high dividend yield can often be a warning side, but in National's case, I'm not that concerned. One reason for my optimism is that National focuses exclusively on "small-box" retailers that sell internet-resistant products or services. The company's tenants include takeout and dine-in restaurants, automotive service centers, wholesale clubs, convenience stores, movie theatre, and fitness centers, among others. Thus, the vast majority of National's customers are not facing anywhere near the same level of challenges that are plaguing J.C. Penny's, Sears, or Kohl's right now.
Beyond being choosy with its customers, National also protects itself by making its clients sign long-term net lease contracts. This makes it the tenant's responsibility to cover all property level expenses such as taxes, insurance, maintenance, and utilities.
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These factors combine to make National's business extremely stable. So stable, in fact, that National's occupancy rate didn't even dip below 96% during the teeth of the financial crisis. That's a big reason why it has been able to pay out a growing dividend for 27 years in a row.
Overall, National's stock might be down, but the company's business model remains rock-solid. Income-focused investors should consider taking advantage of that fact.
Too stable to ignore
Tyler Crowe (Magellan Midstream Partners): The market's reaction to Magellan Midstream Partners has been nothing short of puzzling over the past few years. Even though the company has grown distributable cash flow and its payout like clockwork, Magellan's stock is down more than 18% over the past three years and has a distribution yield of 5.3%.
It's easy to see why investors would be slightly more skeptical of oil and gas stocks and master limited partnerships in general as many have gone belly up or have cut their payouts. If you look deeper into the details of Magellan's business, though, you can't find any of the issues that led to those blowups.
One major leg up that Magellan has over other midstream pipeline companies is that a majority of its business is delivering refined products like gasoline and diesel to end markets. Many of those pipelines serve what are called uncompetitive markets, and as a result, Magellan's business is regulated by the Federal Energy Regulatory Commission much like an electric utility. That means the company enjoys a fixed rate of return in exchange for near-monopolistic control of the flow of gasoline and diesel across large parts of the U.S.
Also, Magellan's management team has been insistent on investing only in high-return projects and maintaining a modest balance sheet. These two things are the driving factors behind Magellan's streak of 17 straight years of raising its payout.
Wall Street keeps flocking out of this stock for reasons that are hard to understand, so investors looking for high yield should take a look at Magellan's stock.
The hydro dividend
Travis Hoium (Brookfield Renewable Partners): The world of yieldcos has been a strange segment of the market over the last few years as companies have risen and fallen on the market's whims. One company that's been incredibly consistent is Brookfield Renewable Partners, which owns primarily hydro-generating assets but is starting to sprinkle in some other renewables as well.
Unlike most yieldcos that seek to grow through issuing new shares and debt and then acquiring projects with returns greater than the corresponding cost of capital, Brookfield Renewable Partners seeks to grow organically. It tries to buy projects that have returns of 12% to 15% and then grow dividend distributions by 5% to 9% annually from organic cash flow growth and project development. This is a much more organic way of growing the business rather than the path other yieldcos have taken.
From a dividend standpoint, the stock yields 6.2% and should grow slowly but surely over time. As an energy investor, I'd rather be in a growing renewable energy business that's taking market share in electricity generation than a fossil fuel business that's losing market share every year. That should help stabilize the dividend and drive future growth in revenue.
10 stocks we like better than National Retail Properties
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Brian Feroldi has no position in any of the stocks mentioned. Travis Hoium has no position in any of the stocks mentioned. Tyler Crowe owns shares of Magellan Midstream Partners. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.