1 High-Yield Stock for 2017 and Beyond
The definition of a high-yield stock varies depending on who you talk to. For instance, some say it needs to have a higher yield than the average of the S&P 500 Index. But given that the benchmark index is yielding a measly 1.88% at the moment, even a two-percent-yielder would be considered a high-dividend stock according to that definition.
When you think about it, a two-percent yield is really not that much. The yield on the benchmark 10-year U.S. Treasury note is now at 2.245%. If the two-percent-yielding stock doesn’t offer enough growth prospects, why bother taking the risk with equities?
The blunt reality is that due to the fact that investors have been searching for yield over the past several years, the price of the most solid dividend payers have already been bid up. And since a company’s dividend yield moves inversely to its price, you rarely see a well-known dividend giant offering a decent yield.
That leaves us with the lessor-known dividend-paying companies. Don’t worry, I’m not going to tell you about some shaky business that’s about to cut their payout soon. The company I’m looking at actually runs a rock-solid business. Moreover, it has a handsome dividend yield of 7.8%.
The high-yield stock in question is Enviva Partners LP (NYSE:EVA), a master limited partnership (MLP) headquartered in Bethesda, Maryland.
For those not in the know, MLPs are quite different from regular dividend stocks. An MLP must earn at least 90% of their income from what’s called “qualifying sources,” such as the processing and transportation of natural resources.
MLPs are also pass-through entities when it comes to taxes. Normally a company’s income is first taxed at the corporate level, and then taxed again at the personal level when distributed to shareholders. MLPs, on the other hand, are not subject to taxes at the corporate level.
Furthermore, in almost every MLP’s partnership agreement, there are distribution requirements. Typically, an MLP is required and incentivized to distribute almost all its available cash every year to unitholders. The mandatory distribution requirement is a key reason why MLPs are the higher-yielding stocks in today’s market.
Investors familiar with MLPs would know that many of them are involved in the oil and gas business. With the downturn in commodity prices in recent years, the oil and gas sector doesn’t seem to be in the best shape.
The neat thing is, while Enviva is an energy MLP, its business has nothing to do with oil and gas.
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A Unique Business
Fossil fuels are still the bread and butter of the energy sector. Despite the efforts of finding alternatives, most clean energy solutions are quite expensive.
Enviva, however, is in the business of processing a type of biofuel that can be used to replace coal in the power generation process: wood pellets.
To put it simply, the partnership takes wood fiber, a natural resource, and turns it into wood pellets. Enviva started this business in 2004. Today, it is the largest producer of wood pellets in the entire world.
I know what you are thinking: wood pellets are yet to enter the main stage in America. But in economies where there are stringent renewable targets, such as the U.K. and the European Union, the demand has been rising. Consulting firm Hawkins Wright Ltd predicted that from now until 2021, the demand for industrial wood pellets is expected to increase at a compound annual growth rate of 17%. (Source: “Outlook for Wood Pellets,” Hawkins Wright Ltd, last accessed July 21, 2017.)
Source: “Business Overview,” Enviva Partners LP, last accessed July 21, 2017.
The best part is, Enviva is the only supplier of scale that can meet the demand. The partnership has six production plants located in Virginia, North Carolina, Mississippi, and Florida. Together, these plants have an annual production capacity of around three-million metric tons of wood pellets.
Enviva’s business is also stable. The partnership’s production plants are fully contracted. Its take-or-pay contracts have a weighted average remaining term of 9.8 years.
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A stable business model allows a generous Enviva dividend. With a quarterly distribution rate of $0.5550 per unit, the partnership has an annual dividend yield of 7.8%. What’s more is that since EVA stock’s initial public offering in 2015, the partnership has raised its payout every single quarter. (Source: “Enviva Partners, LP Announces Seventh Consecutive Distribution Increase,” Enviva Partners LP, May 3, 2017.)
The Bottom Line on This High-Yield Stock
In a market where high-momentum stocks are making double-digit moves every other day, the power of dividends has largely been forgotten. But for those that are looking to generate a steady stream of income from their portfolio, a high-yield stock like Enviva can be of great help.
If an investor wants to generate $5,000 of extra income a year from a dividend-paying stock, they would need to put down $64,102 if the stock yields 7.8%. If the stock is providing the average S&P 500 yield of 1.88%, the initial investment needed to generate $5,000 a year would be a much more substantial $265,957.
In other words, Enviva can help a lot more income investors achieve their goals. And since it’s backed by a rock-solid business, it is a top high-yield stock for income investors.