Collect Reliable Dividends From High-Yield Stocks?
It’s not easy being a dividend investor these days. After three consecutive interest rate cuts by the U.S. Federal Reserve, the U.S. stock market has soared to a new all-time high. And due to the inverse relationship between dividend yield and share price, the rally in the stock market means yields are now subdued.
To give you an idea, the average dividend yield of S&P 500 companies is just under 1.9%, which is substantially lower than the benchmark’s historical average dividend yield of 4.3%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed November 11, 2019.)
Of course, this doesn’t mean there are no high-yield stocks. Using a stock screener, investors can easily find companies that pay multiple times more than the benchmark’s average.
But if you take a closer look, you’ll see that investors aren’t really rushing toward those ultra-high yielders. The reason is that, in this day and age, a high dividend yield might be a sign of trouble, with the most common concern being the company’s inability to cover its payout.
That’s why, when looking for dividend stocks, yield should not be the only criterion. Ideally, you’d want to find companies that offer generous yields and that can also cover their dividends.
While there’s no such thing as the perfect stock, here is a list of three of my favorite dividend stocks that offer a good balance between high yield and dividend safety.
Keep in mind that these stocks are not recommendations, but they should provide a good research starting point for investors who are looking for high-yield stocks in November 2019.
Top 3 Safe High-Yield Stocks for November 2019
| Company Name | Stock Ticker | Dividend Yield |
| Sun Life Financial Inc | NYSE:SLF | 3.6% |
| Enviva Partners LP | NYSE:EVA | 7.6% |
| Delek Logistics Partners LP | NYSE:DKL | 10.9% |
Sun Life Financial Inc
First on the list is Sun Life Financial Inc (NYSE:SLF), which, if you live in the U.S., may not be a familiar name. Headquartered in Toronto, Ontario, Sun Life is a Canadian financial services company that’s mostly known for life insurance. The company offers a wide range of insurance, wealth management, and asset management to individual and corporate clients in Canada, the U.S., the U.K., Asia, and other parts of the world.
And while Sun Life Financial Inc is a Canada-based company, its shares trade on the New York Stock Exchange, so it’s very easy for U.S. investors to get a piece of the action.
The No. 1 reason for investors to consider SLF stock is to collect its growing dividends. Over the last five years, the company’s quarterly dividend rate has increased by 52.7%. (Source: “SLF – Sun Life Financial Inc. Common Shares,” Sun Life Financial Inc, last accessed November 11, 2019.)
The latest dividend hike arrived earlier in November, when Sun Life announced a five-percent increase to its quarterly dividend rate to CA$0.55 per share. At the current share price, SLF stock offers an annual dividend yield of 3.6%, which is nearly double that of the average S&P 500 company.
Sun Life has been around since 1865. Can this century-old company afford all these recent dividend increases?
Yes, because Sun Life is still running a growing business.
In the third quarter of 2019, the company earned CA$809.0 million in underlying net income, which translated to $1.37 per share. This represented a sizable increase from the CA$730.0 million, or $1.20 per share of underlying net income earned in the year-ago period. (Source: “Sun Life Reports Q3’19 Reported Net Income of $681 Million and Underlying Net Income of $809 Million,” Sun Life Financial Inc, November 6, 2019.)
And considering that the company paid a cash dividend of CA$0.525 during the quarter, its underlying net income payout ratio was 38.3%.
Here’s the neat part. According to Sun Life’s latest investor presentation, its medium-term financial objectives include underlying earnings-per-share growth of eight to 10 percent and dividend payout ratio of between 40% and 50%. (Source: “Building Sustainable Shareholder Value,” Sun Life Financial Inc, last accessed November 8, 2019.)
In other words, if Sun Life achieves its financial objectives, it will likely dish out some sizable dividend increases.
And since we are talking about reliable high-yield stocks, it’s worth noting that, even during the last financial crisis—when many American financial institutions slashed their dividends, Sun Life Financial Inc did not cut its payout to shareholders.
Of course, while a 3.6% yield isn’t bad at all in today’s market, many income-seeking investors would probably want something more exciting. So let’s move on to the really big yielders.
Enviva Partners LP
Enviva Partners LP (NYSE:EVA) is in the wood pellet business, which may not seem that exciting at first glance. Yet, this business has created one of the most generous income streams in the stock market.
How generous is EVA stock?
Well, in October, the board of directors of Enviva’s general partner declared a quarterly cash distribution of $0.67 per common unit. The distribution will be paid on November 29 to unitholders of record as of November 15. (Source: “Enviva Partners, LP Reports Financial Results for Third Quarter 2019 and Announces Seventeenth Consecutive Distribution Increase,” Enviva Partners LP, October 30, 2019.)
With EVA stock trading at around $35.00 per unit, the quarterly cash distribution that the partnership is paying in November translates to an annual yield of 7.7%.
A yield as high as this can make investors concerned about the stock’s dividend safety. So let’s take a look.
Enviva Partners LP is a master limited partnership (MLP), and like most MLPs, it reports something called distributable cash flow. In order for an MLP’s payout to be considered safe in a given reporting period, it needs to generate distributable cash flow that is in excess of its cash distributions.
The partnership last reported earnings on October 30. The report showed that, in the third quarter of 2019, Enviva Partners LP generated $26.9 million in distributable cash flow while paying out $22.4 million in actual cash distributions. That translated to a distribution coverage ratio of 1.2 times, indicating that the partnership earned more than enough cash to cover its payout.
Nowadays, investors would be pretty happy to earn a safe yield of 7.7%, but Enviva Partners LP’s unitholders got an even better deal than that.
Since EVA stock went public in April 2015, the partnership has increased its per-unit payout every single quarter. (Source: “Enviva Partners, LP Common units representing limited partner interests (EVA) Dividend History,” Nasdaq, last accessed November 11, 2019.)
That’s 17 consecutive quarterly distribution hikes!
The best part is, wood pellets are a renewable fuel that can provide a low-cost alternative to coal in power generation. As countries around the world adopt more stringent renewable energy targets, the demand for wood pellets could experience a substantial increase.
And it just so happens that Enviva is the largest supplier of industrial wood pellets in the world. It owns and operates seven plants strategically located in the southeastern U.S., with a total annual production capacity of almost 3.5 million metric tons of wood pellets. (Source: “Business Overview,” Enviva Partners LP, August 12, 2019.)
It’s safe to say that Enviva Partners LP is well positioned to capitalize on the rising demand for wood pellets. And as the partnership further grows its business, investors will likely have plenty more distribution hikes to look forward to.
Delek Logistics Partners LP
Now, this one is for the real yield-hungry investors.
Delek Logistics Partners LP (NYSE:DKL) is an MLP that owns, operates, acquires, and constructs logistics and marketing assets in the crude oil and refined products sector.
Headquartered in Brentwood, Tennessee, the partnership was created by Delek US Holdings Inc (NYSE:DK) in 2012. Today, DKL stock has a market capitalization of $804.5 million, so it’s not really big enough to make headlines in the financial media.
Still, the sheer size of this partnership’s payout makes it stand out. Delek Logistics Partners is paying a quarterly cash distribution of $0.88 per common limited partner unit in November. At DKL’s current stock price, that payment translates to a jaw-dropping annual yield of 10.9%.
Frankly, a yield that’s above 10% seems too good to be true in today’s market environment. Nevertheless, the partnership has no problem covering its payout.
You see, the company’s latest earnings report showed that Delek Logistics Partners LP generated $33.7 million in distributable cash flow in the third quarter of 2019. For the quarter, the MLP paid $30.4 million in actual cash distributions. As a result, it achieved a distribution coverage ratio of 1.1 times, leaving a margin of safety. (Source: “Delek Logistics Partners, LP Reports Third Quarter 2019 Results,” Delek Logistics Partners LP, November 4, 2019.)
Better yet, Delek Logistics Partners LP managed to pay not only a reliable distribution, but an increasing one.
Looking back, we see that, since the partnership completed its initial public offering (IPO) in 2012, management has raised the payout to unitholders every single quarter. (Source: “Delek Logistics Partners, L.P. Common Units Representing Limited Partner Interests (DKL) Dividend History,” Nasdaq.com, last accessed November 8, 2019.)
This is quite impressive because double-digit yielders are not considered to be the safest bets. They are more often associated with dividend cuts than dividend increases. The steadily increasing distributions of DKL stock are a rare find among ultra-high-yielding stocks.
The best part is that, in the third-quarter earnings release, management said that they “remain committed to grow our distribution per limited partner unit by at least 10% annually through 2019.” (Source: Delek Logistics Partners LP, op. cit.)
So while Delek Logistics Partners LP’s current payout is already massive, its next distribution could be even bigger.