2 Low-Risk, High-Yield Stocks that are Still Undervalued - Cabot Wealth Network

2 Low-Risk, High-Yield Stocks that are Still Undervalued

Certain dividend-paying pockets of the market have yet to recover from March 2020. And that makes these two high-yield stocks appealing.

The market has doubled from the low of March 2020. That means that in the last year and a half the market has gained all the value that it accumulated from the beginning of time until March of 2020.

At the same time, economic growth in the pandemic recovery has already peaked. From here, it’s downhill. We also find ourselves in what are historically the worst months of the year for the stock market, September and October. It doesn’t seem like a great time to buy stocks.

Of course, that is not to say that stocks are doomed. They aren’t. The fact is money has no place else to go but stocks to fetch a decent return in this low interest rate environment. Sure, the market could sell off at any time. But fear always wanes. And when it does, investors will flock right back to stocks.

But the returns of the last year and a half simply cannot continue. If you haven’t invested heavily, you may feel you’ve missed the boat. And if you have been investing, the easy money is gone and the party is over. While that may be true for rising stock prices in general, it’s not true of another key aspect of investing – yield. And today, I have a couple low-risk, high-yield stocks to recommend.

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There are weird pockets of the market that have not yet recovered from the pandemic. Certain dividend-paying stocks still have prices well below pre-pandemic levels and the dividend yield is sky high. Certain well-selected stocks among this group are not only selling at cheap valuations with high yields, but those dividends are safe and growing.

There are still places where there are safe dividends with yields of 6% to 8% or higher. That’s a big deal when the average S&P 500 yield is 1.31% and the yield on the Barclays Aggregate U.S. Bond Index is 2.2%.

The market is high. Outsized stock returns may be over. But for yield seekers, it’s still the spring of 2020 in places. There are still huge bargains left over from the pandemic. But they too are unlikely to last.

Here are two phenomenal high-yield stocks that are still ripe for plucking.

High-Yield Stock #1: ONEOK Inc. (OKE)

Yield 6.8%

ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, Mid-continent and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.

Here are some things to like about the company and stock.

  • Investment grade rated debt
  • 85% of earnings fee-based
  • 25 years of stable and/or growing dividends
  • C-corporation structure (generate a 1099 and not a K1)

The yield is high because the stock is cheap. OKE is still priced nearly 30% below the pre-pandemic high. But that’s an aberration because earnings are much higher. The midstream energy company actually grew earning in the pandemic-stricken year of 2020. And the company grew earnings (as measured by adjusted EBITDA) by 50% more than last year’s second quarter.

It’s a more stable business than most energy companies because it isn’t reliant on commodity prices but instead collects a fee for servicing natural gas. Those fees are backed by long-term contracts with inflation adjustments. It’s also more stable than most midstream companies because it operates in carbon friendly and high demand natural gas and natural gas liquids (NGL).

In one of the worst years ever for the energy industry, ONEOK’s NGL volumes continued to grow anyway, up 20% from the prior year. Natural gas transportation volumes also continued to grow last year.

The dividend has been maintained or grown for the last 24 years, including through the financial crisis, the energy crash and the pandemic. The stock had been a stellar performer before the pandemic, returning over 400% in the five years prior.

With OKE, you get a high yield that’s safe and a good chance of appreciation.

High-Yield Stock #2: AGNC Investment Corp. (AGNC)

Yield 9.0%

AGNC is a mortgage real estate investment trust (REIT) that invests predominantly in U.S. government backed residential mortgages. It pays a very high dividend yield and makes payments every month.

While typical REITs own actual physical real estate properties, charge rent, and pass that income onto shareholders, mortgage REITs are a different animal. They buy mortgages and generate income from monthly mortgage payments. A mortgage REIT borrows money at low short-term rates and uses that money to buy mortgages that pay higher long-term interest rates, making a profit on the difference, or the net interest spread.

AGNC invests almost entirely in mortgages backed by Fannie Mae and Freddie Mac, so there is virtually zero credit risk. However, there is certainly interest rate risk. It’s all about the spread. If the difference between the short-term rates at which it borrows money and the mortgage interest paid increases, so do profits. When the spread decreases, profits fall.

AGNC had been thriving in the market recovery as the economy recovered and interest rates rose. The stock rose from under 10 per share in the pandemic bear market to almost 19 by the end of May this year. Since then, AGNC has pulled back to the current 16 per share as the flattening yield curve has weighed on profits.

But rates have likely fallen too low and are likely to rise. The current 1.31% rate on the benchmark 10-year Treasury is well below the average of between 2% and 3% in the decade prior to the pandemic. Rates are now below those of a normal economy while economic growth is booming and inflation is persistent. Longer-term rates are likely to rise in the months ahead, steepening the yield curve and likely increasing AGNC’s stock price.

But despite the lower rates, business is solid in the booming economy as mortgage demand is high. The REIT is earning more than enough to at least maintain the current dividend. So, you’re getting a safe 9.0% yield on a stock that is likely to appreciate as rates trend higher.

What high-yield stocks do you own in your portfolio? Tell us about them in the comments below.

Tom Hutchinson

High Income and Peace of Mind

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.

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