The Best High-Yield Stocks for 2020
What is a high-yield stock?
Well, generally speaking, it’s a stock with a dividend yield that’s higher than the yield of a benchmark average. One of the most-used benchmarks is the 10-year U.S. Treasury note.
But this means the definition of a high-yield stock changes over time. For instance, back in January 2000, the yield on the 10-year U.S. Treasury note was 6.6%. Today, it’s 1.8%. (Source: “10 Year Treasury Rate – 54 Year Historical Chart,” Macrotrends LLC, last accessed January 14, 2020.)
Therefore, if a company has an annual dividend yield of 2.5%, it would be considered a high-yield stock today but not a high-yield stock 20 years ago.
And given the uncertainties looming in the distance, it doesn’t look like the U.S. Federal Reserve will raise interest rates anytime soon. We could be stuck in a low-yield environment for quite some time.
Now, investing for passive income is something that a lot of people would like to do. But because interest rates are low and stocks are always risky, diving right into the world of ultra-high yielders can seem a bit scary.
That’s why today I would like to go through three high-yield stocks with you. The lowest-yielding stock on this list yields about twice as much as the 10-year U.S. Treasury note.
3 Top High-Yield Stocks for February 2020
| Company Name | Stock Ticker | Dividend Yield |
| Digital Realty Trust Inc | NYSE:DLR | 3.6% |
| Royal Bank of Canada | NYSE:RY | 4.0% |
| Oasis Midstream Partners LP | NASDAQ:OMP | 11.9% |
Digital Realty Trust Inc
First on the list is Digital Realty Trust Inc (NYSE:DLR), which, as the name suggests, is a real estate investment trust (REIT).
If you’ve been following this column, you’d know that I’m a big fan of REITs. The reason is that they are basically landlords that collect rental income from their properties and pass that income to shareholders in the form of dividends.
The business model is proven to work and has served income investors well for decades. Today, REITs can own many different types of properties, such as office buildings, apartment complexes, shopping centers, and hospitals.
Digital Realty Trust owns what just might be the most interesting type of real estate: data centers.
Right now, the company’s portfolio consists of 211 data centers totaling 34 million square feet of rentable space in 14 countries. (Source: “Investor Presentation November 2019,” Digital Realty Trust Inc, last accessed January 14, 2020.)
One of the fastest-growing segments in technology right now is cloud computing. That is, companies are moving from traditional on-premise deployment to cloud-based solutions. As a result, the demand for data centers has increased substantially.
Digital Realty was right there to capitalize on that trend. The company currently has more than 2,000 customers, including tech giants like Facebook, Inc. (NASDAQ:FB), Oracle Corporation (NYSE:ORCL), and IBM (NYSE:IBM).
Since 2005, DLR’s core funds from operations (FFO) per share have increased at a compound annual growth rate (CAGR) of 13%. (Source: Ibid.)
As you’d expect from a REIT with a booming business, Digital Realty has dished out a lot more cash to investors as the years have gone by. The company has increased its quarterly dividend rate every year for the past 14 years, at a CAGR of approximately 11%. (Source: “Dividend History,” Digital Realty Trust Inc, last accessed January 14, 2020.)
Trading at $120.78 per share, DLR stock offers investors an annual dividend yield of 3.6%. That’s about double the yield of the 10-year U.S. Treasury note.
Furthermore, the payout of this high-yield stock is safe. Digital Realty’s latest financial report showed that, in the nine months ended September 30, 2019, the company generated core FFO of $5.03 per share. (Source: “Digital Realty Reports Third Quarter 2019 Results,” Digital Realty Trust Inc, October 29, 2019.)
Its dividend payments, on the other hand, totaled $3.24 per share during this period. That resulted in a payout ratio of 64.4%, leaving a wide margin of safety.
And given what the company has been doing, I don’t think management will stop the payout hike streak anytime soon. In the past, the board of directors of Digital Realty Trust Inc usually announced dividend increases in February. So, in the next few weeks, the company should have some good news for dividend investors.
Royal Bank of Canada
Canadian bank stocks are some of the best-kept income secrets in today’s market. Royal Bank of Canada (NYSE:RY), for instance, pays a quarterly cash dividend of CA$1.05 per share. (Source: “Dividend History For Common Shares,” Royal Bank of Canada, last accessed January 14, 2020.)
That translates to a generous annual yield of four percent (at its current share price of $80.60).
Royal Bank stands out when it comes to providing recession-proof dividends. You see, during the last financial crisis, many U.S. banks—including some of the biggest names in the business—cut their dividends. Royal Bank of Canada, on the other hand, managed to maintain its payout during that rough period and resume dividend growth in 2011.
Of course, to most Americans, Royal Bank probably isn’t a familiar name. But the company has a deeply entrenched market position north of the border. It’s Canada’s largest bank by market capitalization, serving 17 million clients in Canada, the U.S., and 34 other countries. (Source: “Royal Bank of Canada Investor Presentation Q4/2019,” Royal Bank of Canada, last accessed January 14, 2020.)
Because Royal Bank operates around a fiscal year that ends on October 31, it has already reported the financial results for full-year fiscal 2019.
For the fiscal year, the bank generated net income of CA$12.9 billion, an amount that not only represented a four percent increase from the prior fiscal year, but also marked a new record for the company. (Source: “Royal Bank of Canada Reports Fourth Quarter and 2019 Results,” Royal Bank of Canada, December 4, 2019.)
Diluted earnings came in at CA$8.75 per share, which marked solid year-over-year growth of five percent.
As I said earlier, RY is a dividend growth stock. In 2010, the company paid total dividends of CA$2.00 per share. In 2019, it paid CA$4.07 per share. So, over the last decade, the bank’s payout to shareholders has more than doubled.
Another thing that makes RY stock worth considering is the frequency of its distribution hikes.
Nowadays, most companies would be proud to offer annual dividend increases. Yet, over the past several years, Royal Bank of Canada has been raising its dividends every six months. If the board decides to follow that pattern, the next dividend-increase announcement should arrive in February.
Oasis Midstream Partners LP
With heightened geopolitical uncertainty, oil prices recently shot up.
Income investors might want to tap into this opportunity. But instead of buying shares of drillers, there are more income-investor-friendly ways to invest in the energy sector. In particular, midstream master limited partnerships (MLPs) could be worth a look.
Case in point: Oasis Midstream Partners LP (NASDAQ:OMP). This MLP was created by Oasis Petroleum Inc (NASDAQ:OAS) to own, operate, develop, and acquire a diversified portfolio of midstream assets in North America.
OMP’s assets are not only integral to the oil and gas operations of Oasis Petroleum, but also strategically positioned to capture volumes from third-party producers.
Today, the No. 1 reason to check out OMP stock is the sheer size of its payout. Oasis pays investors a quarterly cash distribution of $0.515 per unit, which, at a unit price of $17.25, translates to a jaw-dropping yield of about 12%.
And if you think a yield at this level is too good to be true, a look at the partnership’s financials should be reassuring.
According to its latest earnings report, Oasis Midstream generated $35.7 million in distributable cash flow in the third quarter of 2019, which covered its total cash distribution of $18.1 million for the quarter nearly twice over. (Source: “Oasis Midstream Partners LP Announces Quarter Ended September 30, 2019 Earnings,” Oasis Midstream Partners LP, November 5, 2019.)
Looking further back, you’ll see that Oasis Midstream Partners earned $90.7 million of distributable cash flow in the first nine months of 2019. Its actual cash distributions, on the other hand, totaled $51.3 million for this period.
Therefore, the partnership achieved a distribution coverage ratio of 1.8 times. Such a strong coverage ratio implies that, even if business slows down, there’s still a good chance for the MLP to cover its payout.
Of course, generally speaking, double-digit yielders are not known for their dividend safety. Among the companies that yield 10% or more in today’s market, dividend cuts are not uncommon.
But Oasis Midstream Partners has never cut its payout. As a matter of fact, since the partnership went public in September 2017, management has increased the cash distribution every single quarter. (Source: “Oasis Midstream Partners LP Common Units Representing Limited Partner Interests (OMP) Dividend History,” Nasdaq, last accessed January 14, 2020.)
Looking ahead, Oasis management is targeting an organic 20% distribution-per-unit growth rate beyond year-end 2021. (Source: “November 2019 Investor Presentation,” Oasis Midstream Partners LP, last accessed January 14, 2020.)
What this means is that, if an investor purchases this high-yield stock today, chances are that they’ll collect an even higher yield on cost in the quarters ahead. And that’s why OMP stock deserves your immediate attention.