1. Why is the yield higher? and
2. Are these higher yields sustainable?
Structure Driven Yields
One variation in yields can be attributed to the entity's tax structure. For example, Master Limited Partnerships and REITs do not pay income taxes. Instead, earnings are passed to investors who pay the taxes. Yields on these types of investments tend to be higher. Since the entity doesn't have to pay income taxes, there is more cash to distribute. Also, since earnings from these investments don't qualify for preferential dividend tax rates, the market adjusts the price of the investment down, which increases the yield, to compensate for the additional taxes owed.Risk Driven Yields
The most significant determinant of yield is risk. In a world where risk is equal across all investments, yields within the same industry and investment vehicle would tend to be homogeneous with very little variation. When yields dramatically increase compared to the company's peers, this is a sign that there is increased risk with that investment. Before investing, you need to understand this risk to determine if you are willing to accept it.This week week, I screened my dividend growth stocks database for the highest yielding stocks, not considering any other factors. The results are presented below:
Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor. Like all energy companies, low crude sales and low prices will eventually lowers cash flow then squeeze the funds used to pay dividends. The danger for a cut is real. Yield: 22.2%
Tanger Factory Outlet Centers (SKT) is a self-administered and self-managed real estate investment trust that develops, acquires, owns, operates and manages factory outlet shopping centers in the United States. REITs enjoy high yields since they do not have pay taxes if they distribute 90% of their earnings. Unlike partnerships, their income is reported on a 1099 for tax purposes. Low interest rates have benefited REITs. As a retail REIT, SKT relies on payments for tenants. With COVIND-19, retail sales are drying up. The question is how long will the COVIND-19 crisis last? Yield: 20.6%
ONEOK, Inc. (OKE) is a an Oklahoma-based natural gas utility with substantial midstream operations through its 2% general partnership interest and large limited partnership interests in a master limited partnership. Limited partnerships yields tend to be significantly higher since they don't pay income taxes. Instead, the partnership's investors are responsible for the taxes (which could include multiple state tax returns.) Each year the entity issues a K-1 tax form to its unitholders to be incorporated into their tax returns. K-1s often run late (March/April delivery) and include potentially complex tax issues. Currently with a negative free cash flow and a slowing economy, a dividend cut is real possibility. Yield: 18.1%
Meredith Corp. (MDP) publishes a suite of magazines and websites focused on food, parents and women (e.g. Better Homes and Gardens) and operates 17 local TV stations. MDP operates in a declining industry. When people lose their jobs, renewing magazine subscriptions is not the best use of their limited cash. Yield: 14.9%
Main Street Capital Corporation (BDA) is a business development company specializing in equity, equity related, and debt investments in small and lower middle market companies. MAIN is a business development company. Like real estate investment trusts (REITs), BDCs are not taxed at the corporate level as long as they pay out to shareholders at least 90% of their taxable annual net income each year and derive 90% or more of their gross income from dividends, interest, and capital gains on securities. As such, they can pay higher dividends. However, their cash flow is tied to smaller business that they lend money to. In an economic downturn, MAIN's cash flow can turn ugly fast. Yield: 13.8%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is a spreadsheet containing more than 20 columns of information on approximately 200+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: long MDP, MAIN,
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Tags: HP, SKT, OKE, MDP, MAIN,
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