The Trouble With Some High-Yield Stocks…
This might irritate some folks, but I’m not especially fond of high-yielding stocks. Especially in today’s environment…
Now before you stop reading, hear me out.
I logged on to my TreasuryDirect account the other day — a place where you can buy Treasury Bills or Notes — and was extremely disappointed to see that a recent auction for an 8-week Bill had an interest rate of just 0.1%, and a 10-year note was offering a pitiful 0.625% interest rate.
Of course, this shouldn’t have been a surprise, considering we have historically low interest rates. But it made me realize that income seekers are having an extremely tough time trying to find a safe place to park their cash.
To reach for a little extra income, investors often stretch out into riskier areas. They invest in stocks sporting lofty dividend yields thinking they can collect a handsome dividend check. But they often don’t realize if those dividends can be supported by the business.
Take Brookfield Property Partners (Nasdaq: BPY) and its subsidiary Brookfield Property REIT (Nasdaq: BPYU) for example. Income investors looking for a nice yield might see BPY’s current 12.3% dividend yield (and the low nominal stock price of around $11.50 per share) and think they could put some cash to work and start collecting a nice dividend check.
Of course, you can do that, but I would caution against it. I think BPY is a trap for yield hunters…
When High-Yielders Turn Into A Trap
Now before I dive into why I’m urging caution before investing in BPY or BPYU, understand that I don’t actually hate dividend stocks. Dividend stocks can be wonderful investments, especially when you reinvest dividends.
I just know that some of my worst investments have been in companies that sported high dividend yields. I believed the businesses were solid, yet, they slashed their dividends and shares crumbled. And I don’t care how good the dividend yield is if I’ve lost 50% of my principle.
Longtime readers might remember our investments in Macquarie Infrastructure (NYSE: MIC) and Occidental Petroleum (NYSE: OXY). Both companies slashed their dividends and the shares collapsed. Even had we continued to hold onto shares (hoping for a rebound), we still wouldn’t be even close to recovering today.
As you can see, even after we cut our losses, had we held, we would be down an additional 25%. And it’s hard to recover from devastating losses.
High Debt And An Unstable Portfolio
Brookfield Property Partners is managed by legendary Brookfield Asset Management (NYSE: BAM). BPY’s portfolio includes some notable assets, such as Canary Wharf in London and Lever House in New York. Its portfolio also includes “core retail” malls with tenants like JC Penney. It also has 253 office properties around the world and a plethora of other real estate. (For the record, BPY owns about 95% of BPYU.)
Despite the fact that the global health pandemic has greatly accelerated the already declining mall scene, and forced office and retail space to be essentially vacated, BPY and BPYU haven’t cut their distributions.
On the surface, this might seem like these investments are simply better than their peers. But I have a hard time believing that (especially when looking at the financials).
You see, recent research notes that all mall REITs with the exception of BPYU have cut dividends. And 36% of all REITs, in general, have slashed their dividends.
I believe BPY and BPYU will follow suit, which will be detrimental to share price. You see, BPYU currently is in default on $1.2 billion of mortgage debt across 12 properties and has roughly $4.9 billion coming due by the end of 2021.
Both entities have extremely high levels of debt and are trading at much higher multiples than their peer groups. BPY has a debt/EBITDA of 15.4x, while BPYU’s is 14.3x. The peer group average, meanwhile, sits at just 7.4x.
In 2019, before Covid-19 set in, BPY produced funds from operations (FFO) of $624 million. Yet its interest expense alone was $2.9 billion. In its most recent quarter, its dividend payout as a percentage of its FFO was 188%. In other words, it dished out more in dividends than its operations brought in.
The only thing that seems to be propping up the dividends from BPY and BPYU is the bailouts from Brookfield Asset Management (BAM). BAM has infused roughly $2.4 billion into the entities through the first half of the year.
I could go on and on, but here’s my point… When you’re seeking out income-producing stocks, you need to be skeptical of high yields. Watch out. Be careful. You might think you’re getting a 12%-plus yield from a stock like BPY, but it may not last for long.
Perhaps BPY will be able to weather this storm, maintain its distribution, shed its excessive leverage, and manage its debt defaults. But those are a lot of obstacles to overcome. So be wary of BPY and BPYU and other stocks sporting sky-high yields. Do your research.
That’s why I’m so excited about my latest find… My research has led me to a little-known tech stock that’s involved in several massive tech trends: the Internet of Things, satellite technology, 5G, communication, the list goes on…
And the good news is that right now it’s completely unnoticed by the market. That makes it a perfect setup to make investors a lot of money in the coming months.