1 Stock That Pays A Safe And Growing 13% Yield
A yield this high can bring in extraordinary income for investors, but many will not go near a stock with a 13% yield because they fear it is loaded with risk. Although in many cases this is true, Tim Plaehn shows through cash flow analysis how this company can comfortably afford this growing yield.
While I am somewhat of a small fish in the big financial publishing ocean, I always enjoy when I see my theories or observations repeated elsewhere. During a couple of recent earnings conference calls, I heard Wall Street analysts question management about unique points I have been making in my articles.
Now, one of the income stocks I follow and recommend is using an analysis technique that I use frequently to better explain how they fund those big dividends. Maybe they did not get the idea from one of my presentations, but each piece of information like this can help income investors make better investment decisions.
When analyzing high-yield stocks, traditional stock analysis metrics like earnings per share (EPS), payout ratios, and price to earnings (P/E) ratios do not provide an accurate picture of whether a company with a high dividend yield can support and grow the dividend payment. When I make presentations at investor conferences and discuss my strategy with my newsletter subscribers, I dig deeply into more advanced free cash flow analysis.
One of the companies that I use to illustrate cash flow is Ship Finance International Limited (NYSE:SFL). Ship Finance pays a large and steady dividend, but the company’s quarterly earnings per share has varied a lot, both higher and lower than the quarterly per share dividend payment.
With each quarterly earnings release presentation, Ship Finance includes a trailing twelve month cash flow waterfall style chart. I use this chart to show cash flow coverage of the dividend. For example, here is the chart from a year ago.
The rightmost blue bar shows that over the previous 12 months the company generated $186 million of unencumbered, free cash flow. I would then tell my audience that the company had paid out about $160 million in dividends over the same period. So at that point in time, Ship Finance generated enough cash flow to cover the dividend by a factor of 1.16 times.
Related: How to earn $5,179.80 in extra income by Tax Day (April 15th).
Over the last year, Ship Finance has been growing its free cash flow even as the SFL share price dropped by 20%. Here is the cash flow waterfall chart from the just released 2015 fourth quarter earnings presentation:
The far right bar shows that the Ship Finance management team is now following my analysis technique by graphically illustrating the cash flow coverage in relation to the dividend payment amounts. Sweet!
As you can see, over the last 12 months cash flow coverage has grown to 1.48 times the dividend amount. The company has also increased the quarterly dividend three times by a total of 7% in the last year. This is a fine and highly recommended high-yield stock. These are strong and surprising cash flow and dividend numbers on a stock that yields 13.8%.
Cash flow per share analysis can help you dig out more stocks like Ship Finance. These are companies with a high yield combined with strong and growing cash flow coverage of the dividend payments.
Finding stable companies that regularly increase their dividends is the strategy that I use myself to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and regular dividend growth is what has given me the most consistent gains out of any strategy that I have tried over my decades-long investing career.
And, there are currently over twenty of these stocks to choose from in my Monthly Paycheck Dividend Calendar, an income system used by thousands of dividend investors enjoying a steady stream of cash.
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The Calendar tells you when you need to own the stock when to expect your next payout, and how much you can make from stable, low-risk stocks paying upwards of 12%, 13%, even 15% in the case of one of them. I’ve done all the research and hard work; you just have to pick the stocks and how much you want to get paid.
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Position: Long SFL
Category: Dividend Stocks
