Is It Possible to Earn a High Return with Low Risk?
Today’s income investors are facing a tough decision. They can either go with a well-known dividend stock with a low yield, or a high-dividend stock that looks risky.
The blunt reality is that the current market environment simply isn’t friendly to dividend investors. Historically, the S&P 500 Index has had an average dividend yield of 4.37%. Today, companies in this benchmark index have an average yield of 1.89%.
This is partly due to the ultra-low interest rate environment that the U.S. Federal Reserve adopted for most of the last decade. When fixed-income investments were yielding next to nothing, investors rushed toward stocks of dividend-paying companies. Before you knew it, the stock prices of the most solid dividend payers shot through the roof, and their yields are no longer attractive.
For instance, if you put your money in the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL), an exchange-traded fund that tracks the performance of S&P 500 companies that have raised dividends for at least 25 years, you would be earning just a 1.91% dividend yield.
Does that mean income investors have to settle for a low yield? Not necessarily. The dividend stock I’m going to show you next is currently paying 10.3%, and its business is rock-solid.
Earn a 10.3% Yield from This Top Dividend Stock
Let me guess: You’re thinking about how double-digit yielders are usually considered risky bets. This one, however, could be worth owning, even for the most conservative investor.
The chart below shows this high-yielder’s dividend history since 2013.
(Source: “Quarterly Distributions,” Sunoco LP, last accessed July 28, 2017.)
As you can see, the stock’s payout has been steadily increasing. From a per-unit distribution of $0.4375 in March 2013, to the $0.8255 paid in May 2017, this high-dividend stock has raised its per-unit payout by a whopping 88.7% in just over four years.
What’s even more impressive is that this high-yield stock is from the energy sector.
I’m talking about Sunoco LP (NYSE:SUN), a master limited partnership (MLP) headquartered in Dallas, Texas. Sunoco is in the downstream energy sector, while the partnership is in the wholesale fuel distribution business. It also operates retail fuel sites and convenience stores.
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As we know, there has been a major downturn in the energy sector. With oil and gas prices plunging deep into the doldrums, many energy companies and partnerships have been facing some serious problems. Layoffs have become the norm for the sector since the commodity price downturn started in the summer of 2014.
What’s more is that, with businesses slowing down, some energy companies also decided to slash their dividends. To investors who rely on the returns from their dividend portfolios, few things are worse than a dividend cut.
And that’s why this high-dividend stock stands out. Despite being a double-digit yielder, its distributions have been more than solid. The partnership was able to substantially raise its payout when many of its peers were reducing their dividends.
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A Unique Investment Opportunity
One of the reasons why the partnership is able to achieve distribution growth is its unique competitive advantage in the fuel distribution business. Gasoline is a highly commoditized product, but Sunoco was able gain a significant share in the distribution business by building a strong brand name. In fact, Sunoco is currently the only non-refiner wholesaler that has its own fuel brand.
The partnership further solidifies its brand with a huge presence in motorsports. Sunoco is currently the official fuel sponsor of NASCAR. It also supplies the official fuel for over 500 American racetracks.
Not everyone drives a high-performance vehicle. But when people see that all the race cars are running on Sunoco’s fuel, they know it will be good enough for passenger vehicles.
The neat thing with wholesale fuel distribution is that the business is conducted through long-term, fee-based contracts. Moreover, while gasoline is a commodity, fuel margins have remained resilient through all the ups and downs of the economy. This allows Sunoco stock to generate steady cash flows, something that’s extremely important to a high-dividend stock.
In its wholesale segment, Sunoco has approximately 5,660 wholesale locations and approximately 2,165 commercial customers located along the East Coast, the Southwest, and Hawaii. In 2016, the partnership’s wholesale segment distributed 5.3-billion gallons of fuel.
(Source: “Investor Presentation,” Sunoco LP, last accessed July 28, 2017)
The partnership’s huge presence in the wholesale fuel distribution business not only allows it to keep costs down through economies of scale, it also provides it with geographical diversification.
Furthermore, Sunoco is selling a large number of its retail convenience stores, which is a more capital-intensive business than wholesale fuel distribution. The sale of 1,100 of Sunoco’s convenience stores to 7-Eleven, Inc would simplify the partnership’s business and lower its costs.