We live in a low interest rate world. Take a look around. A 10-year Treasury bond pays just 1.79%. A five-year CD pays 2.2% on average. The dividend yield on the S&P 500 is only 1.85%. After taxes and inflation, these traditional investments probably give you a negative real return.
That’s a problem because people need income more than ever. Many can expect to live 20 or even 30 years after retirement. And they’ll need to get a decent return on savings in order to not run out of money. Isn’t this just like the world? When income is needed most it becomes harder than ever to get.
But there’s good news. The market is inefficient sometimes. The investment herds run around and sometimes leave great opportunities out in the open. Such is the case today. If you look hard enough, there are places where you can find high-yield undervalued stocks – specifically, overlooked stocks with a yield of at least 6.5% where the payout is safe.
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These opportunities are unlikely to last. Eventually the market will wise up. But these high-yield undervalued stocks are out there now and you can still scoop them up. Here are two.
2 High-Yield Undervalued Stocks
High-Yield Undervalued Stock #1: Enterprise Product Partners (EPD, 6.72% yield)
Energy has been the most beleaguered sector of the market by far. It is the worst-performing sector of the S&P 500 for the last 10 years, 5 years, 3 years, 1 year and year-to-date. The problem is that huge new production from the U.S. has shaken up the global energy market.
Oil prices crashed between 2014 and 2016 as new American supply hit the market while global demand for oil declined amidst a sputtering global economy. Energy markets still haven’t found order in the new paradigm. But while markets haven’t recovered, earnings of certain companies have. One is Enterprise Product Partners.
This is one of the largest midstream energy companies in the world that generates profits from the piping and storage of oil and gas. The company has very little exposure to volatile commodity prices and merely collects a fee for servicing oil and gas assets during an energy boom in this country.
Enterprise is a Master Limited Partnership (MLP) with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.
An estimated $44 billion per year will need to be spent on energy infrastructure to accommodate the new supply through 2035. Enterprise is expanding and has $5 billion in projects under construction and between $5 and $10 billion in development. That should provide ample growth to go with the 6% yield.
The company has one of the best distribution coverage ratios, over 1.7 times, in the industry and has grown the payout every quarter for the last 20 years. Even though the stock still sells more than 30% below its 2014 high, earnings have grown an average of 11% per year over the last five years. Enterprise is growing earnings, selling at a dirt cheap valuation (P/E of 11.9) and paying a safe 6.7% yield.
High-Yield Undervalued Stock #2: Altria (MO, 6.76% yield)
Altria Group (MO) is the largest U.S. domestic cigarette maker and one of the largest in the world. The company is the domestic part of the old Philip Morris that spun off the international division in the form of Philip Morris International (PM) in 2008. Altria now operates primarily in the United States.
It has ancillary businesses in wine, beer and tobacco substitutes but the overwhelming majority of revenues are generated from its dominant Marlboro cigarette brand. Historically, this has been one of the best-performing dividend stocks on the market but it has stumbled lately. The stock is down more than 35% from the 2017 highs.
The problem is that cigarette volumes have been falling at an increasing rate as more people have switched to e-cigarettes. In an effort to counteract the situation and find growth elsewhere, Altria purchased a 45% stake in marijuana company Cronos (CRON) and a 35% stake in e-cigarette maker JUUL over the past year. Since then, e-cigarettes have been under constant assault by regulators and marijuana stocks have become out of favor with investors, for now.
Cigarette volumes are slipping and the counter measures aren’t working out so far. But Altria continues to grow earnings and the dividend is safe. There’s also this: If e-cigarettes don’t work out, people will smoke more cigarettes. If they do, the investment in JUUL will work out. Thus, Altria has it coming and going.
Meanwhile, the tobacco companies have not sold at valuations this cheap since there was a risk of bankruptcies with the regulatory assault 20 years ago. But there is no such risk today. Altria has a proven ability to overcome hurdles. It sells at a bargain price (11 times forward earnings estimates) and pays a safe 6.76% yield. It’s also worth noting that this stock has performed very well in times of recession.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More