2 Dividends Over 10% That Are Actually Secure

| August 13, 2018

VanguardWhen it comes to dividends, any stock yielding more than 10% these days needs to be taken with a grain of salt. That’s because bigger isn’t usually better when you’re talking about dividend yields.

The FOMC has targeted short-term rates of between 1.75% to 2.00% in the U.S. and the yield on the benchmark 10-year note is hovering around 3%. Almost any other income investment can be priced based off these rates, depending on how much extra risk you’re willing to take on.

Historically-speaking, any time a stock is paying more than seven percentage points above the AAA-rated, government-secured debt, investors begin to worry if the dividend could be cut.

However, not all dividends above 10% are too good to be true. Just two months ago, I highlighted Global Partners (GLP) and its 10.8% annual yield. The stock is up 14% since and has also increased its quarterly dividend.

As with Global Partners, the key is to find high-yielders where the company generates enough cash to cover the dividend. Along those lines, I’ve found two more stocks with double-digit yields that appear to be safe.

Secure 10% Dividend No. 1: Yield Rising for Right Reasons

AG Mortgage Investment Trust

AG Mortgage Investment Trust (MITT) is a real estate investment trust (REIT) that invests in residential mortgages and related instruments. The company also appears to be a rare case where its dividend yield isn’t in the double-digits because of a cratering stock price.

Excluding one-time items, AG Mortgage earned $0.55 a share in the second quarter, which was $0.03 ahead of the consensus analyst estimate. The upside was driven by lower costs. In addition, about half of the company’s investments are floating rate, so it won’t get crushed by any future rate increases like some mortgage REITs.

AG Mortgage’s profit last quarter was more than enough to cover the quarterly dividend of $0.50 a share (10.8% yield) that management actually raised in June. In addition, the company is sitting on an additional $1.57 undistributed taxable income, which is like a rainy day fund that could sustain the dividend, should future profits dip.

Secure 10% Dividend No. 2: Simplifying to Focus on Growth

NGL Energy Partners

NGL Energy Partners (NGL) is a diversified firm that is re-focusing efforts on its fastest growing businesses in the energy market. Back in May, the company sold its retail propane operations for $900 million.

Management is using the proceeds to pay down debt and also invest in growth opportunities within NGL Energy’s wastewater disposal and oil logistics businesses. The company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 106% in the most recent quarter, with the wastewater disposal operations driving growth both organically and through acquisitions.

The stock offers a dividend of $0.39 a share (12.7% yield), which management cut back in 2016 but once again appears to be on solid ground. NGL Energy is targeting 1.3x coverage of the current payout with cash flow in fiscal 2019 (ending June).

After selling the propane business, management is also closer to its target of 70% fee-based revenue, to help limit future commodity price volatility. The re-shuffled company still has a lot to prove investors, but the outsized dividend appears safe.

A stable dividend yield of 10% is nice, but there are far more landmines than potential winners in this space. There are better bargains to be had, for secure 7% to 8% yields with upside and monthly payouts to boot.

 

Like These Plays: The 8 Best 8% Dividends with Big Upside to Buy Today

Most Wall Street spreadsheet jockeys say we investors can’t have both the income and safety of bonds and the upside of stocks. We have to choose, or allocate, or whatever.

They’re wrong. They don’t realize that the nine bond funds in our Contrarian Income Report portfolio have delivered average annualized returns of 23.9% (including dividends)!

Our three top picks today are poised to continue the tradition. These funds are a cornerstone of my 8% “no withdrawal” retirement strategy, which lets retirees rely entirely on dividend income and leave their principal 100% intact.

Well that’s not exactly right. Their principal is more than 100% intact thanks to price gains! Which means principal is actually 110% intact after year 1, and so on.

To do this, we seek out closed-end funds that:

  • Pay 8% or better…
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  • Trade at meaningful discounts to their NAV…
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If you’re an investor who strives to live off dividends alone, while slowly but safely increasing the value of your nest egg, these are the ideal holdings for you. Click here and we’ll explain more about our no withdrawal approach – along with details on our three favorite closed-end funds for 8.5%, 8.7% and 8.9% yields.

 

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Category: Dividend Stocks

About the Author ()

David Peltier is the Senior Investment Analyst at Contrarian Outlook.

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