It’s been a strong year for growth stocks and a good one for the stock market as a whole, but whether it’s due to lingering fear of a potential stock market decline or demographics (as more people retire), the demand for bonds and income remains at incredible heights. But safe high yield dividend stocks haven’t gotten as much love as you’d think.
For instance, while U.S. equity funds and ETFs have attracted just $13 billion so far this year, bond funds and ETFs have collected a mind-boggling $160 billion! And this comes on top of huge inflows into bond funds last year ($190 billion), too.
We’re expecting 30% to 50% gains from virtually each of this week’s Top Ten trades—with the biggest moves coming after next week’s economic reports.
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However, our experience is that when most people think of income, they think either of (a) blue-chip dividend stocks that pay 2% to 4%, or (b) some open-ended bond mutual fund that offers a similar yield, but has no maturity date. While both have their advantages, the fact is that both also have a lot of risk, either when the stock market falls (dragging down even the bluest of blue chips) or when interest rates rise (dragging down bond funds).
It turns out there are far better options for individual investors, providing higher yields, maturity dates, or both! Below are three of our favorite safe high yield dividend stocks to own today—all three have a major margin for safety and provide yields of 7.5% or more.
Here are three safe high yield dividend stocks (7%-plus yields!) we think are buyable right now.
Safe High Yield Dividend Stock #1: GasLog Ltd. Preferred A shares
Symbol: GLOGprA or GLOG-A at most brokerages
Coupon: 8.75% fixed annually ($0.548 per share, per quarter)
Pay Dates: First of January, April, July and October
Qualified Dividends: Yes
Callable: October 2020
GasLog (common stock symbol: GLOG) is an owner/operator of 28 liquefied natural gas (LNG) vessels, both directly and through its limited partnership, called GasLog Partners. Shipping stocks can be touch and go, but LNG shipping is a relatively fast-growing industry as more LNG terminals come on line and, more important from an income perspective, GasLog has focused on long-term charters of its vessels to energy giant Shell. (It has five vessels in the spot market, while its others are on long-term charters.)
In fact, GasLog is in the process of a good-sized expansion with Shell, with every ship chartered for at least seven years—four hit the water last year, with another five coming in 2018 and early 2019. It does have three ships finishing up their charters next year, and another three in 2019, but with the LNG market strengthening, the odds strongly favor those ships being inked to new deals with ease.
Thanks to last year’s four new ships, revenues rose 23% in the first quarter of 2017, while earnings before depreciation rose 150%. And those figures should continue to rise as new ships hit the water next year.
For the owner of the preferred stock, there’s a lot of safety here. Annually, GasLog’s preferred payments total just $10 million per year, but by comparison, the company pays about $45 million in common dividends annually, and its earnings before depreciation in the first quarter alone was north of $57 million!
Moreover, each of the five new ships delivered to GasLog starting next year are expected to bring in more annual cash flow than the current preferred payments. Beyond that, the company has done a great job of refinancing debt due in the near-term, and there’s limited refinancing needed through 2021.
One risk when it comes to the preferred shares is if Shell (which makes up the majority of the firm’s business) were to somehow renege on its contracts if the LNG industry hit the skids. But that’s unlikely as the LNG shipping market actually tightens in the years ahead.
Another risk is that GasLog can “call” (buy back) the preferred shares for $25 each starting in late October 2020 if they so choose. Yet with the preferreds trading around $26, the risk there isn’t great.
Lastly, of course, given that this preferred issue has no maturity date, there’s the risk if interest rates rise. But given the high coupon of 8.75%, we don’t think the price will fluctuate much unless interest rates really pick up; to date, the post-election bump in interest rates has had little-to-no effect on the price.
All told, GLOGprA is a great, safe, high yield preferred stock that should crank out big payments for the next few years at least.
Safe High Yield Dividend Stock #2: NuStar Series B Fixed-to-Floating Preferred Shares
Symbol: NSprB or NS-B at most brokerages
Coupon: 7.625% fixed annually ($0.476 per share, per quarter) through June 2022; rate will then float at 5.64% plus three-month LIBOR
Pay Dates: 15th of March, June, September and December
Qualified Dividends: No (sends a K-1 at tax time)
Callable: June 2022
NuStar is a good-sized midstream master limited partnership, with 8,700 miles of pipelines, 95 million barrels of storage capacity and 79 terminals, spread across the U.S in many of the country’s strongest drilling areas. About half of business comes from pipeline operations and the other half from storage—and both are around 95% fee-based, which gives NuStar tremendous stability no matter what oil and gas prices do.
A good example of this was during the late-2015 and early-2016 energy bust. Despite the crash in prices, NuStar’s distributable cash flow barely budged; in fact, the company never cut its dividend during the downturn and its dividend coverage ratio (cash flow divided by total dividend payment) never fell below 1.
With such a solid foundation, the company is now going on the offensive, announcing the acquisition of Navigator Energy Services in the red hot Permian Basin. The deal will bring with it 500 miles of pipelines in the Midland Basin and around one million barrels of storage capacity, nearly all of it with seven- to 10-year firm contracts in place, and plenty of expansion potential as drilling activity ramps.
In part to pay for that acquisition, NuStar floated this series B preferred stock in April 2017. (It has a higher-yielding Series A, but that trades about 8% above par of $26 per share; the B series is just 2% above.) Combined, NuStar will owe all of its preferred shareholders around $12 million each quarter, which is small considering that the the company’s distributable cash flow has totaled between $88 million and $97 million each of the past eight quarters—even when energy prices were in a tailspin.
Perception-wise, the risk here could come from another implosion in oil prices; even though NuStar’s business is highly resilient, investors could hit the preferred stock temporarily if they think the industry is in trouble. But as was seen during early 2016, the odds that the company will run into serious trouble are small.
NSprB is a unique issue in that, for the next few years, the payment is fixed at a 7.625% rate ($0.476 per share, per quarter). After that (starting in the second half of 2022), the rate will float, which gives it some protection from fears of rising interest rates. The floating rate will be 5.64% plus three-month LIBOR, which is currently just above 1%, but will rise if the Fed continues to hike interest rates.
All told, with $1.4 billion in revenues during the past year and a market cap north of $4 billion, NuStar is a legitimate midstream operator that provides its preferred shareholders with not only a high degree of safety, but also a great yield as well.
Safe High Yield Dividend Stock #3: Eagle Point Credit Series B Preferred
Coupon: 7.75% fixed annually ($0.161 per share, per month)
Pay Dates: Last Day of each month
Qualified Dividends: No
Callable: October 2021
Maturity: October 2026
Eagle Point Credit is a closed-end fund that invests in collateralized loan obligations (CLOs), not to be confused with the collateralized debt obligations (CDOs) that crashed everything in 2008. That said, CLOs themselves are relatively risky—think of them as juiced-up junk bonds.
As a fund, then, Eagle Point definitely has some risk, especially if we get a credit crunch like we saw early in 2016. Indeed, the fund’s net asset value fell a whopping 40% from its peak in late-2014 through the bottom in 2016!
Ironically, though, it’s the fact that Eagle Point is a closed-end fund that makes its preferred shares safe. The reason is a section of the Investment Company Act of 1940 that limits the leverage of closed-end funds—in a nutshell, a fund must have twice the amount of assets as it does preferred stock (which serves as leverage for the fund).
If it falls out of line, the fund must sell assets and buy back as many preferred shares in the marketplace in order to get back in compliance—not a great situation, but one that provides a blanket of safety for the preferred holders.
Eagle Point has an even more conservative policy, aiming for about three times as many assets as leverage. Indeed, at the end of April 2017, the company had around $480 million of total assets, but only $151 million of preferred stock and debt. In other words, the fund’s asset values could fall 37% from here and they’d still have twice as many assets as liabilities. Pretty safe!
Moreover, the payments are also well covered. In the first quarter, Eagle Point’s investments brought in a total of $16.3 million of income, which was 5.7 times as much as the $2.9 million in preferred and debt payments it made. Again, lots of cushion there.
The added benefit of ECCB is that it has a mandatory redemption date in 2026; if the fund fails to redeem it then (at $25 per share), the interest rate goes up 2% per year, providing a strong incentive to redeem them. That also means ECCB will be less subject to swings based on interest rates, especially as the maturity date approaches. Even better, the preferred stock pays monthly.
All told, ECCB is one of our favorite income investments.
These are just three of dozens of attractive, safe high yield dividend stocks out there that few investors know about. You don’t have to settle for paltry 2% or 3% yields in bond funds or stocks; you can get even safer, higher yields … if you know where to look!
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More