High dividend yields can sometimes be a warning about the underlying business or sector. This could impact the ability of the company to continue to distribute its dividends to shareholders. A high yield means nothing if it is at danger of being cut or eliminated altogether.
That said, there are many quality securities that provide high, sustainable yields. Even better, some of these names are undervalued and offer double-digit total return potential.
Criteria for high-yield stocks
This discussion will include stocks that meet the following criteria:
- Have a yield above 5%.
- Are rated as undervalued by GuruFocus.
- Have a GF Score of at least 80.
Enterprise Products Partners
The first name up for consideration is Enterprise Products Partners LP (EPD, Financial). Enterprise Products is a master limited partnership that provides storage and transportation for customers in the oil and gas industry. The partnership is valued at more than $58 billion and has generated revenue of $52 billion over the last year.
Enterprise Products acts as a toll road for its customers as it moves crude oil, natural gas, natural gas liquids and refined products across its pipeline network of approximately 50,000 miles. This leaves the partnership slightly less tied to the ups and downs of the energy market.
Performance amid energy market fluctuations
This is evident in the downturns in energy prices over the last decade that barely impacted distributed cash flow. For example, energy prices collapsed nearly 60% from June 20, 2014 to Jan. 28, 2015. Yet, Enterprise Products’ distributable cash flow fell just 7%. At the same time, the share count also expanded by 86 million shares. Even the largest decline in crude oil production that occurred during the worst of the Covid-19 pandemic only resulted in a 15% drop in distributable cash flow for the partnership. Performance during these two periods is considerably stronger than most energy sector companies.
Dividend and total return analysis
Enterprise Products’ ability to navigate energy price downturns is a major reason why the partnership has been able to grow its dividend for 25 consecutive years. The dividend has a compound annual growth rate of just under 4% since 2013, but the stock compensates for this low growth rate by offering a yield of 7.5%. This is five times the S&P 500 Index’s average yield of 1.5%.
This high yield is likely sustainable given the projected payout ratio for 2023 is just 57%. This is only slightly ahead of the 10-year average payout ratio of 52%.
Valuation and potential returns
Enterprise Products is trading below its GF Value. Shares recently closed at $26.81. With a GF Value of $32.99, Enterprise Products has a price-to-GF Value ratio of 0.81. Reaching the GF Value would result in a 23% gain from current levels before even factoring in the stock’s dividend yield. Total returns could approach 30%. GuruFocus rates the stock as modestly undervalued.
Reinforcing the potential for significant returns is Enterprise Products’ GF Score of 88 out of 100. The partnership receives high marks for growth, momentum, value and profitability, while financial strength has a middling rating. This GF Score implies that the stock could see higher returns moving forward based on GuruFocus research.
NNN REIT
Next up is NNN REIT Inc. (NNN, Financial), formerly known as National Retail Properties. NNN REIT primarily owns standalone, single-tenant properties. The trust holds about 3,500 such properties in the U.S. across 48 states. The trust is valued at just over $7 billion and has produced $799 million of revenue in the last year.
NNN REIT has more than 380 tenants in nearly 40 different types of retail, providing a decent amount of diversification. Tenant types includes both limited and full-service restaurants, convenience stores, health and fitness, family entertainment, wholesale clubs and automotive services, among others.
Performance amid market fluctuations
The company's stock has struggled this year, losing 14.2% year to date while the S&P 500 Index is up a mid-teens percentage. This drop in value is not the fault of the business model. NNN REIT’s most recent quarter showed funds from operation growth of 6.7% as the occupancy rate was a very impressive 99.4%. The trust also has significant visibility as the weighted average remaining lease term is more than 10 years.
The likely culprit for the decline is steady rising interest rates, which impact REITs because the cost of capital is much higher than it was even a year ago. The trust does carry a significant amount of debt, nearly $4 billion, but does have a debt-to-equity ratio of 1.06, which is one of the best ratios for NNN REIT in the last decade.
NNN REIT has also performed well under adversity. In 2020, funds from operations declined just 6.2% even as the share count expanded by 4 million. The trust established a new high for funds from operations the very next year, demonstrating its ability to recover from an extremely difficult operating environment.
Dividend and total return analysis
A strong business model and reasonable debt levels have made dividend growth possible for NNN REIT. The company has raised its dividend for 21 consecutive years. Since 2013, the dividend has compounded at a rate of 3.6% annually. Again, this growth is on the low side, but the yield is currently at 5.7%, almost four times the average yield of the market index.
Shareholders should continue to see dividend increases as the projected payout ratio for this year is 69%. This is lower payout ratio than many other REITs. It is also below the trust’s average payout ratio of 76% since 2013 and would be NNN REIT’s lowest in more than a decade if it occurs.
Valuation and potential returns
NNN REIT offers upside potential when comparing its current share price with its GF Value. The stock closed Tuesday at $39.51. The GF Value is $47.09, resulting in a price-to-GF Value ratio of 0.84. NNN REIT could return 19.2% if it were to reach its GF Value. Total returns could be in the low 20% range. Shares earn a rating of modestly undervalued.
NNN REIT has a decent GF Score of 80 out of 100, implying modest returns going forward. This score benefits from solid ratings for profitability, momentum and value, offset by weaker results for financial strength and growth.
Final thoughts
High yields can be enticing for investors, but they can also be a sign of risk. There are those names that can provide high yields that appear to be quite safe. This includes Enterprise Products Partners and NNN REIT, both of which have yields much higher than the average name in the S&P 500. Both companies have stable business models and have performed well under adverse conditions. Each dividend looks to be safe as well. Even better, total returns could be at least in the low to mid-20% range for both stocks.
Investors looking for sources of reliable high yields to go along with double-digit returns should consider adding these stocks to their watchlists.
