Okay, I’m A High Yield Chaser, So What?

Daniele Mezzadri/iStock via Getty Images

This article was co-produced with Mark Roussin

Well, here we go… another new year, and a yet another chance to wipe the slate clean and turn over a new leaf. You may recall my recent 2023 REIT Resolutions article in which I explained,

"I’m not bitter about 2022. And I’m not worried about 2023, even with the looming recession we’re supposed to be in for."

In fact, I’m pumped about 2023 and the year of the most telegraphed recession in history.

So, what's an investor to do?

Sit on cash waiting on the next shoe to drop or load up on some really cheap dividend paying stocks?

Hmmm. Decisions, decisions…

Okay, here's my answer: I’m gonna go shopping for some terrific high yielding stocks.

Does that make me a high yield chaser?

That depends on what you mean by high yield.

A few days ago I wrote about OneMain Holdings (OMF) that offers a hearty 11.4% yield.

Does that make me a high yield chaser?

Maybe or maybe not…

Arguably, any stock with a double-digit yield is considered risky because it means that investors perceive very low growth, or even worse, a potential dividend cut.

But what about yields below 10%?

Does that make me a high yield chaser?

If so…

I guess I’m a high yield chaser.

Altria Group has long been a staple in many dividend portfolios for many years, but since mid-2019, the stock has been trading in a range of $40-$55 for much of the past three and a half years.

Shares of Altria provide investors a high-yield of 8.2%. Not only does the company offer a high dividend yield, but they are also trading at a very compelling valuation.

Before we look at valuation, let's first look at how the stock has performed in 2022.

YCharts

On the year, shares are nearly flat, far outperforming the S&P 500, and from a total return perspective, shareholders have enjoyed a nearly 5% return.

Now let's have a look at valuation. Shares of Altria Group currently trade at just 9.1x next year's earnings. Over the past five years, shares have traded closer to 11.5x.

FAST Graphs

Growth has slowed for the company, but when it comes to high-yield mature dividend stocks, it is less about revenues and more about cash flow.

FAST Graphs

Over the past five years, Altria has been able to generate a free cash flow CAGR of more than 8%, allowing the company to not only pay a high-yield dividend, but a growing dividend at that. Altria has increased their dividend for 53 consecutive years and counting.

The negative with Altria has been their untimely and failed acquisitions. Investments in JUUL and Cronos Group were both disasters, but a more recent investment is the venture they are doing with JT Group focused on heated tobacco products. This has the potential to reignite some growth back into the business.

In a time when the US is expected to enter into a recession, Altria is worth a closer look for investors in 2023, offering a high-yield at a low valuation.

The telecommunications sector has seen growing competition over the past few years between the likes of Verizon Communications, AT&T (T), and T-Mobile (TMUS).

T-Mobile has certainly been taking market share and growing at a strong clip over the past few years, but they do not pay a dividend at all, so they could not be viewed as an option for this piece. That leaves us with the old competitors, VZ vs. T.

AT&T has had numerous hiccups that have put a lot of strain on the company along with mountains of debt. The management team has made numerous poor acquisitions that the company continues to pay for. That leaves us with Verizon.

VZ shares are down 24% on the year, putting them roughly in-line with the S&P 500.

YCharts

Over the past three weeks, when the broader S&P 500 has limped into the end of the year by falling over 4%, VZ shares have stood tall, climbing over 6% during the same period, as investors continue to re-position their portfolios more to defensive names.

Again, assuming we are headed towards a recession in 2023, VZ could be viewed as a safe investment option. In terms of financial health, Verizon is in a much better place than that of AT&T, and the company has a BBB+ credit rating. Things at AT&T were deteriorating, as such, the company decided to separate its telecommunication assets from its media/content business.

The stock price could hold up in an economic downturn, and in addition, the stock offers a very generous dividend yield at 6.7%. Over the past five years, VZ shares have had an average dividend yield of 4.6%.

Although the yield is high for the company, VZ still maintains a safe payout ratio of less than 50%. The company has also increased the dividend for 18 consecutive years now.

Free cash flow continues to remain robust, with the company expected to end 2022 with $20 billion in FCF on the year. This will continue to support this high-yield dividend.

Looking at valuation, VZ shares trade at just 7.9x next year's earnings, compared to a historical average of 11.6x.

FAST Graphs

The final high-yield stock we will look at hails from the REIT sector, and it happens to be the most popular REIT in Realty Income.

Realty Income has a dividend yield that has now reached 4.7%. Looking at the chart below, you can see that over the past decade, any time Realty Income's dividend yield has reached 5%, it has been a great time to buy the stock. We are nearing those levels once again.

YCharts

For those of you unaware, Realty Income is a net lease REIT, which simply means they own properties that are leased out to various tenants, and typical landlord costs such as property taxes, insurance, and maintenance costs are all passed onto the tenants.

The company owns primarily buildings that are leased out to retail tenants. Roughly 85% of the company's annual base rent, or ABR, comes from retail tenants, 14%, from industrial tenants, and the remaining 1% is from other industries.

Realty Income Investor Presentation

Considering we have been talking about a recession already, a retail landlord may not sound all that enticing. Let me clear that up for you. Realty Income is not your typical landlord, they are the gold standard when it comes to REITs, and the retail tenants they lease to are primarily service oriented or non-discretionary type retail.

Looking at the slide below, you can see that over a quarter of the company's rent comes from grocery stores, convenience stores, and dollar stores, all areas that should hold up well in a recession.

Realty Income Investor Presentation

Here is a look at the company's top 20 tenants:

Realty Income Investor Presentation

In all, the REIT has a portfolio that consists of over 11,700 properties, nearly 1,150 customers within 79 industries. The company has a well-diversified portfolio of high-demand properties in all 50 states.

Realty Income has a fortress A rated balance sheet, which gives them a major advantage when it comes to obtaining debt at a lower cost as they continue to expand.

In terms of valuation, REITs are valued based on funds from operations or adjusted funds from operations, rather than EPS. Realty Income currently trades at a forward AFFO multiple of 15.9x compared to a historical average of 19.5x over the past five years, suggesting shares are undervalued at current levels.

FAST Graphs

I recently published iREIT's 2023 REIT Roadmap Portfolio that includes 28 REITs with an average portfolio yield of 5.6% with an estimated 12-month total return forecast of 24%. Included in this REIT portfolio are several mREITs with double-digit yields.

At the end of the day, I suppose all dividend investors are yield chasers…

As my friend Chuck Carnevale would say, "I like my cake and eat it too".

I want sustainable and predictable dividend income as well as superior total returns. That's all for now folks!

Happy New Year!

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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This article was written by

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 100,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) iREIT on Alpha (Seeking Alpha), and (2) The Dividend Kings (Seeking Alpha), and (3) Wide Moat Research. He is also the editor of The Forbes Real Estate Investor.

Thomas has also been featured in Barron's, Forbes Magazine, Kiplinger's, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox.

He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022 (based on page views) and has over 108,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies.

Analyst's Disclosure: I/we have a beneficial long position in the shares of O, OMF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I plan to buy VZ within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.