Every good investor knows that dividend stocks outperform their non-dividend paying counterparts over the long term. Ideally, investors want to find solid dividends that grow steadily over time, which may be harder to find than it seems.
That's why I think it's time to take a fresh look at gaming or casino stocks, which are new to the dividend universe. Gaming stocks have typically been high-risk, high-reward stocks laced with debt. But in recent years, cash flow from casinos around the world has grown so high that the biggest players in the industry are returning billions of dollars to shareholders in the form of dividends. Here are three new gaming dividends you shouldn't overlook.
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The Palazzo and Wynn Las Vegas, owned by two high-yielding gaming companies.
Why Macau -- not Las Vegas -- drove dividends for U.S. gaming stocks Dividends are a new phenomenon in gaming because for decades, it's taken billions of dollars just to build out a casino empire. Caesars Entertainment, MGM Resorts, Wynn Resorts , and Las Vegas Sands were all built with junk bonds from Wall Street that came with relatively high interest rates but huge potential rewards for investors if the casino was successful. When these resorts were successful, they built ever-larger casinos to expand instead of paying out dividends.
For the most part, casinos in the U.S. were successful, but they never led to regular dividends because there wasn't extra cash left over after new buildings were built. That changed in 2004, when a new market in Macau opened that would blow Las Vegas traffic numbers out of the water. In the first year after Las Vegas Sands opened Sands Macau, it generated enough cash flow -- approximated by EBITDA -- to pay for the resort's construction cost. Soon, the race was on to build in Macau as fast as possible simply because it was so lucrative.
Over the next few years, Las Vegas Sands, Wynn Resorts, and Melco Crown built huge resorts in Macau that generated billions in EBITDA every year. You can see below that each of these three companies' biggest resorts have an incredibly high return on investment.
Source: Company SEC filings and earnings releases.
The resulting cash flow gives them an opportunity to either spend money to grow, or return it to shareholders with dividends or share buybacks. They'd love to spend it on growth, but Asian markets are limited by government regulation: these markets are opening up to gambling more slowly than cash is coming in from already existing casinos. So, they have extra cash to pay back to shareholders.
A dividend with room to grow At the moment, Las Vegas Sands and Wynn Resorts are paying annual dividends of $2.60 and $6.00 per share, respectively. Melco Crown has taken the approach of paying 30% of earnings as a dividend, meaning the payout swings from quarter to quarter, but it currently yields about 1%.
These are solid payouts, but they're only sustainable as long as companies have cash flow to pay investors. Clearly, Melco Crown will have the ability to pay its dividend as long as it is profitable, but Las Vegas Sands and Wynn Resorts have relatively manageable payout ratios as well. You can see below that even their 2015 dividend level and 2014 EBITDA rate resulted in payout ratios of less than 40%.
Source: Company earnings releases.
When looking at dividends, the payout ratio gives investors an idea how much wiggle room a company has between a slight decline in operations and having to suspend its dividend. In the cases of Las Vegas Sands and Wynn Resorts, I think there's comfortable margin, which may come in handy as their main market of Macau experiences a downturn.
A dividend to put on your watchlist Many investors have long avoided gaming stocks because they're viewed as high risk. But that label is no longer as accurate as it once was, and industry leaders Las Vegas Sands, Wynn Resorts, and Melco Crown have so much cash that they're returning it to shareholders rapidly.
Maybe it's time to take a look at the gaming industry as a place for a long-term dividend, something that seemed impossible just a few years ago.
The article The New High Yield Dividends Investors Shouldn't Overlook originally appeared on Fool.com.
Travis Hoiumlikes to gamble on high risk/high reward stocks but doesn't like to gamble (much) money in Las Vegas, where the house always wins. That's also one reasons he owns shares of Wynn Resorts, Limited. 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.
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