3 hated dividend stocks to buy now
When looking for dividend stocks, it’s important to strike a balance between yield and fundamentals. Very often, the highest returns are paid for by stocks that cannot sustain the payouts made or have particularly risky prospects. But often the best time to buy a dividend-paying stock is when it’s temporarily out of favor on Wall Street. Here are three names that seem to be out of favor, but still have strong businesses and long-term potential.
1. Energy in motion
The first name is a master limited partnership Enterprise Product Partners (EPD 1.07%), which operates in the midstream of the energy sector. Oil and natural gas-related names are out of fashion today for a number of reasons, including low energy prices, weak demand and the rise of cleaner alternatives. These are very real issues, but they need to be looked at in a larger context. For example, oil is unlikely to be replaced for many years because energy transitions take a long time to materialize. Meanwhile, approximately 85% of Enterprise’s gross margin is generated by fees and is unrelated to the actual price of the goods it helps transport. On the demand side, COVID-19 has artificially reduced energy consumption; as economies around the world reopen, demand will likely return.
Investors willing to step back and consider these facts can take advantage of Enterprise’s nearly 8% yield. This payout is backed by more than two decades of annual payout increases. Additionally, the partnership has long been operated conservatively, with a financial debt to EBITDA ratio that sits at the bottom of its peer group. And despite the issues facing the energy industry, the partnership covered its distribution 1.6x in the first quarter, providing ample headroom for further headwinds. With one of the largest median footprints in North America, Enterprise is well worth a deep dive for income-focused investors today.
2. A diversified donor
The next dividend-paying stock to watch is Real Estate Investment Trust (REIT) WP Carey (WPC 0.61%). The first thing to note here is that Carey owns single-tenant net leasehold properties, which means tenants are responsible for most of the operating costs of the properties they occupy. This is a low-risk business model, with the REIT making the difference between its cost of capital and the rents it charges. Additionally, the company’s leases tend to be long (the average term was over 10 years at the end of the first quarter), providing important revenue support during an economic downturn.
The only problem with the net rental industry in general is that it tends to rely heavily on commercial properties. But WP Carey bucks that trend, with just 17% of its portfolio in the retail space. The rest of the portfolio is in industrial (24% of the portfolio), offices (23%), warehouse (22%), self storage (5%) and others (the rest). That’s more diversification than you’ll find in most REITs, but it’s not the only way Carey is diversified – around a third of the company’s rent comes from Europe. With a yield of 5.8%, an adjusted funds from operations payout ratio of approximately 85% (a fairly reasonable number for a net lease REIT) and over 20 years of annual dividend increases, WP Carey is worth watching as investors round it up. with net-lease peers that are much more dependent on the retail sector.
3. Change is hard for Big Blue
The next name is the tech giant International Business Machinery (IBM -0.05%), which has a 4.8% yield backed by roughly a quarter century of annual dividend increases. In all fairness, IBM has been a hard stock to love for about a decade. That’s because it’s in the midst of a major transition in which it’s ditching old, mature businesses (like building computers) and moving into new growth areas like cloud computing, artificial intelligence, and quantum computing. Because the old businesses generated a lot of revenue and the new businesses are still under development, the company’s revenue has been in fairly steady decline for a long time.
However, the company has an incredible list of clients and has been through transitions like this before. This time around, it looks like IBM is approaching a key turning point, with the recent acquisition of Red Hat positioning it to deliver cloud services across competitors’ products. With new ventures accounting for about half of the company’s revenue at this point, it may not be much longer before IBM’s revenue begins to grow again. The only problem is leverage, as the deal with Red Hat was big and expensive, but even here the company is making significant progress: it has already reduced its long-term debt by more than 10% since the deal was struck about a year ago. The payout ratio, meanwhile, is around 65%, which is manageable. All in all, there are reasons why Wall Street takes a dim view of this tech stock. But if you’re a long-term dividend investor, there are reasons you might want to venture here too.
Time for a deep dive
If you’re a dividend investor, you want to avoid overly risky stocks that can’t sustain the high yields they offer. Enterprise, WP Carey and IBM do not seem to be part of this group. They have solid businesses with a solid future. And if you’re looking to maximize the income your portfolio generates, you might want to add one or more to your portfolio today.