Three Extreme Dividend Stocks
By Marc Lichtenfield, Chief Income Strategist
When it comes to income investing, in many ways, size doesn’t matter.
After all, many companies that pay out hefty 30% or 40% yields aren’t able to sustain those dividends long term.
Then, investors who hopped on board chasing after the money get hit with a disappointing dividend cut or suspension.
But it’s also true that when you’re building passive income streams, it pays to be selective.
For instance, while you might invest in a stock because it’s poised for growth or a short-term gain, most of the time, a 1% yielder isn’t going to catch your eye…
What income investors want is a sizable, growing dividend.
And I’ve written the book on dividend investing – check out Get Rich with Dividends – so I always have my finger on the pulse of what’s happening in the markets…
Which companies are going to reward their shareholders…
And which will fall flat.
In this report, I’ve assembled three of the safest high-yielding dividend stocks around. I also pull back the curtain on the strategy I use to assess the dividend safety of hundreds of stocks every day for my readers.
With these tips – and with three of the market’s safest high-yielders in your portfolio – you’ll become a master of dividend safety.
My Go-To Dividend Safety Assessment Strategy
Before I get into why my top three high-yielding stocks of the moment deserve your attention, it’s important to mention why these have caught my eye.
The first thing that’s really important to me when assessing dividend safety is cash flow. A company should have sufficient cash flow to support its dividend.
Note, I didn’t say it should have sufficient earnings. There’s a big distinction between earnings and cash flow.
The metric “earnings” includes all kinds of noncash items, whereas “cash flow” is really just representative of the cash that came into the company – and therefore is available to pay shareholders.
Here’s a very brief example…
Let’s say a company records a big sale on December 30. It sells $1 million worth of widgets. It can book that sale and include it as revenue, which trickles down to earnings on its year-end results.
But the truth is, the company might not have even sent out an invoice yet, much less gotten paid. Meanwhile, its revenue and earnings have gone up even though it hasn’t taken in any more cash.
Next year when the company sends out that invoice, maybe the customer returns the item. Maybe the customer goes bankrupt, or maybe it just takes a long time to pay. That would drastically affect the cash flow available for the company that made the sale.
That’s why, as a dividend investor, I’m really concerned only with the cash that comes into the company. That’s the cash that’s going to pay my dividend – not earnings, which include noncash items.
It’s also really important to me that a company have a long, reliable track record of dividend payments. I want to invest only in a company that hasn’t cut its dividend – and I’d prefer to invest in a company that has raised its dividend every single year.
Companies that raise their dividends every year for 10 years are termed Dividend Achievers, and companies that raise their dividends every year for 25 years or more earn the prestigious title of Dividend Aristocrat.
A perfect example is PepsiCo (Nasdaq: PEP).
In May last year, Pepsi raised its dividend for the 48th year in a row. That sets the bar pretty high for investors, encouraging them to expect a dividend increase every single year.
After all, what do you think would happen if, after almost five decades of consistent dividend increases, Pepsi cut its dividend or suspended it altogether?
I think you’d see a disproportionate number of pitchforks and torches at its next shareholder meeting…
In short, a company’s track record, while not a guarantee, is a strong indicator of its dividend safety.
Combined with steady cash flow, a company’s track record gives me confidence in its payout – which is why my three top picks right now bear looking into for any income investor…
3 Safe Yet High Dividend Payers
No. 1: Arbor Realty Trust
Arbor Realty Trust (NYSE: ABR) is a mortgage real estate investment trust (REIT), meaning it invests in mortgages and pays the income out to shareholders.
This stock has a big 9.4% yield. In October, the company raised its quarterly dividend to $0.32 per share. That was the second raise in 2020 – a year when other mortgage REITs had been slashing their dividends. Arbor has raised its dividend every year since 2013.
Through the first three quarters of 2020, Arbor paid out $102 million in dividends while generating $124 million in net interest income.
Mortgage REITs borrow money at lower short-term rates and lend it out at higher longer-term rates. The difference, minus expenses, is called net interest income. That net interest income is how we determine whether a mortgage REIT can afford its dividend.
Arbor Realty can.
Wall Street expects the company to grow earnings by 8% per year over the next five years. That should ensure that the dividend continues to be paid… and also very likely gets raised.
No. 2: Flushing Financial
Here’s a super exciting company – Flushing Financial (Nasdaq: FFIC). When people talk about Tesla (Nasdaq: TSLA), Moderna (Nasdaq: MRNA), Facebook (Nasdaq: FB) and other big highfliers, they usually also mention this Queens, New York, regional bank.
I’m kidding, of course. But what is exciting is that this company pays a rock-solid 5.5% yield. It has maintained or raised its dividend every year since 1997.
As with mortgage REITs, we use net interest income to analyze the dividend safety for banks.
Flushing Financial generated $120 million in net interest income in the first three quarters of 2020. It paid out just $18 million in dividends, so its net interest income is many more times what it pays in dividends.
This appears to be about as secure a dividend as you’ll find.
No. 3: Omega Healthcare Investors
While the demographics are strongly in its favor, the nursing home business isn’t always the easiest, even in a non-COVID-19 world.
Regulations seem to change daily, many of the homes are at the mercy of Medicare for reimbursement and qualified labor is hard to find.
So despite 10,000 baby boomers turning 65 every day, investing in a nursing home is not a slam dunk.
I do like, however, the business of being a landlord to assisted living facilities like nursing homes. If a nursing home intends to keep its doors open, it must pay its rent, plain and simple.
Omega Healthcare Investors (NYSE: OHI) owns the real estate for 957 assisted living facilities in 40 states plus one facility in the U.K.
It is a real estate investment trust. As a result, its funds from operations (FFO) is a more important metric to look at rather than earnings or cash flow.
The company’s FFO hasn’t been particularly impressive over the past few years, though it is rebounding strongly from dips in 2017 and 2018.
In 2019, Omega generated $640 million in FFO and paid shareholders $564 million in dividends for a payout ratio of 88%.
In 2020, the company is forecast to report $649 million in FFO (final year-end figures haven’t been released yet) and pay $608 million in dividends, which equals a 94% payout ratio.
REITs must pay out 90% or more of their earnings. As a result, most pay dividends equal to most or even all of their FFO. So a payout ratio that high doesn’t bother me.
Omega Healthcare Investors has a strong dividend-raising track record, paying shareholders more dividends every year since 2004.
The fact that the company raised the dividend even when FFO fell a few years ago gives me added confidence that the dividend is safe.
With the dividend at $0.67 per share quarterly, the yield comes out to 7.2%. A yield like that – particularly one that is not in jeopardy – is not easy to find in this market.
The nursing home business might not always be consistent. But Omega Healthcare Investors’ dividend sure is.
Don’t Get Caught by Surprise
Now you see why I don’t look for only the largest dividend payers…
Successful income investors will look to the companies with the most generous and sustainable payouts.
And as I explained above, they can judge their holdings’ dividend safety by taking a look at the companies’ cash flow metrics and track records.
Each week in my free e-letter, Wealthy Retirement, I analyze the dividend safety of a company based on reader requests.
And now that you’ve seen a few of the tricks up my sleeve, you’ll be able to ensure that your favorite dividends also stay secure.
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Last Updated: January 2021