The stock market has racked up high returns for the first half of 2019. The second-quarter corporate earnings reports so far have not been stellar. So far it’s tough to envision a scenario where the major stock indexes tack on another 10% to 15% in gains for the second half of the year. I think it’s likely that what performs well in the second half of 2019 will be much different from what made investors money in the first half.
While growth stocks have done well so far this year, a lot of high-yield stocks have lagged the major market indexes. High-yield is a different world. The primary investor concern is whether a company can continue to pay those big dividends. High-yield comes with what I call the binary outcome potential. On one side is the company will continue to pay the dividend.
This is the desired outcome, and the significant yield becomes your expected return. The flip side is the dividend cut the market has priced into the shares. A high-yield is the indicator that the market has built in the probability of a dividend reduction. A dividend reduction cuts twice, first your income gets reduced, and second, the reduction usually produces a significant share price drop.
Your goal as an income stock investor is to seek out higher yield stocks where you have conviction the dividend is secure. If you can find stocks with 10% plus yields and the dividends keep coming, you have a good chance to outperform the stock market for the rest of 2019. To find “good” high yield stocks, you need to understand how the individual companies generate cash flow to pay the dividends.
Further, you’ll need to monitor each company every quarter to make sure the dividend is secure. If you like high-yield, but don’t want to become a corporate accountant or Wall Street analyst, consider signing up for my Dividend Hunter service.
To get you started, here are three stocks with yields over 10% where currently the dividend looks secure. They are good ideas for where to begin your research.
GasLog Partners LP (GLOP) is a publicly-traded partnership that owns a fleet of 15 liquid natural gas (LNG) carrier vessels. Most of the fleet is on long term lease to Royal Dutch Shell plc (RDS.A). The leases provide predictable cash flow, and even with its high yield, GLOP has been growing its dividend by 3% to 5% each year.
The danger is that dividend coverage is very tight, with a first-quarter distributable cash flow of just 1.03 times the dividend. Global LNG trade is a growth business, which is positive for the long-term success of GasLog Partners. The stock currently yields 10.1%.
Global Net Lease (GNL) is a $1.6 billion market cap real estate investment trust (REIT). The company focuses on sale/leaseback transactions, where it buys commercial properties and leases them back on triple-net leases to the selling company.
Portfolio properties are evenly split between the U.S. and Europe, with 55% of the portfolio being office buildings. The danger for GNL is after the initial lease period expires if the tenant company doesn’t renew, the expense to retrofit and release will be very high. The shares currently yield 11,2%.
New Residential Investment Company (NRZ) is a finance REIT which has operations in the various phases of the residential mortgage market. Its primary investments are in mortgage servicing rights (MSR). These are fee stream paid on every individual residential mortgage.
The danger to NRZ is that high refinancing activity will deplete the MSR payments stream. To counter this, New Residential has diversified into other sectors of the mortgage business. The shares currently yield 13.1%.
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Source: Investors Alley