2 Scorching-Hot High-Yield Dividend Stocks -- Are They Buys Right Now?
Though investors have seemingly thousands of publicly traded stocks to choose from, the best-performing investment portfolios over the long term are often those with a strong base of dividend stocks.
It's not hard to see why investors like income stocks, either. To begin with, a company probably wouldn't be paying a dividend if its management team didn't believe it wouldn't remain profitable and/or grow over the long run. In effect, a regularly paid dividend is a beacon for a time-tested business model.
Dividends can also help hedge against inevitable stock market corrections. While a payout alone is unlikely to erase a double-digit stock market correction, it can help calm the nerves of investors. Lastly, dividends can be reinvested through a dividend reinvestment plan, or Drip, which is a strategy that some of the smartest money managers use to compound the wealth of their clients.
Are these scorching-hot income stocks worth buying today?
In theory, we want the highest guaranteed income we can generate from high-yield dividend stocks (typically defined as roughly a 4% yield or higher), with as little risk as possible. Of course, balancing income versus risk isn't always easy. Two scorching-hot high-yield dividend stocks -- Rio Tinto (NYSE: RIO) and The GEO Group (NYSE: GEO) -- have returned a respective 46% and 57% over the trailing one-year period. Clearly, investors are excited about their high yields and long-term prospects, as you'll see below. But should you be considering these high-yield dividend stocks as buys today? That's a question we'll aim to answer.
Diversified mineral mining company Rio Tinto has been practically unstoppable over the past year, with its shares up 46%. The company, which produces iron ore, bauxite, alumina, copper, diamonds, and coal, delivered a great first half of 2017 earnings report, which has fueled buying in the stock. Of particular note, Rio Tinto has been piling on the shareholder returns of late, including $2 billion in payouts for dividends (Rio Tinto is currently yielding 3.7%), and another $1 billion set aside for the repurchase of common stock, which will be added to the $200 million remaining from its previously announced buyback. Repurchasing its common stock should lower its outstanding share count and possibly have a positive impact on earnings per share.
But the big question remains: Is Rio Tinto still a buy? The answer probably depends on how well commodities perform globally.
In terms of cost and debt reductions, Rio Tinto has done everything that Wall Street and investors could ask for. It's reduced its debt by $2 billion, six months ahead of its year-end 2017 target, to $7.6 billion, with the $2.7 billion divestment of its thermal coal business in Australia really helping out in that regard. Scaling back a bit on capital expenditures, and making its existing mining operations more efficient, has played a key role as well. If commodity prices were to remain as they are now, Rio Tinto being valued at less than 11 times this year's projected full-year EPS looks like a bargain.
The unknown is what'll happen with its Pilbara iron ore mine. Considerably higher prices led to 87% earnings growth through the first half of 2017, despite a 2% decline in production. As long as exports remain strong and China's economy continues to plug along at its superior growth rate, it's possible the iron ore price rally can continue. Of course, there are no guarantees, and with Pilbara accounting for 44% of Rio Tinto's total sales in the first half of the year, as goes Pilbara, so goes Rio Tinto. If this writers' arm were twisted, I'd suggest modest intermediate-term upside is possible for Rio Tinto.
The GEO Group
Another high-yield stock that's been squarely on the radars of income investors is real estate investment trust GEO Group. GEO Group is a private prison operator and contractor, and since it's a REIT, which gives the company clear tax advantages in exchange for paying out most of its profits as a dividend, it's currently paying out a greater than 7% yield.
Why the sudden love for GEO Group? Donald Trump's election in November was a key catalyst. In 2016, prior to Trump's election, the federal government announced that it would be ending private prison contracts. While these contracts only made up a small percentage of total sales for GEO Group and the industry, it shook investors in private prison REITs to the core. Trump's election means the extension of government contracts with private prison operators like GEO Group. Furthermore, Trump's expected crackdown on illegal immigrants is expected to lead to an uptick in incarcerations, which has GEO Group and its shareholders excited for the future.
But is GEO Group still a buy after rising by 57% over the trailing year? As long as Trump's in the White House and Republicans control Congress, the GEO Group may have modest upside. Historically, the U.S. locks up a greater percentage of its population than any other country, which bodes well for GEO Group over the long run. This success can be seen in the company's second-quarter results, whereby revenue increased nearly $29 million to $577.1 million, and normalized funds from operations grew by $1.1 million year over year.
If there is one factor that investors will need to monitor closely, it's capital generation. GEO Group disburses a lot of its profits to shareholders as a dividend, meaning expansion is occasionally funded through the issuances of new shares. As with any stock, issuing new shares can dilute the value of existing shareholders. Yet, even with this dilution, GEO Group has delivered solid results for investors over the past year. If you keep your expectations modest, you'll probably be pleasantly surprised by GEO Group.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.