As I've said before, it's best to approach ultra-high yields above 10% with a healthy amount of skepticism. More often than not, the lofty rate stems from a plunging share price, not from a rising distribution. And stocks seldom get cut in half without a reason -- particularly when the major averages are setting new highs almost daily.
I found 170 candidates in this month's screen offering rich payouts of 10% to 15%. Frankly, most of these obscure businesses aren't worth your time or money. Many are irreparably damaged and in terminal decline. But if you dig through enough rubble, you sometimes get rewarded with a diamond in the rough.
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Occasionally, I run across solid businesses facing threats that are real, but over-exaggerated and surmountable. They might have temporarily drifted off course, but are capable of weathering the storm and righting the ship. These underappreciated companies are often able to maintain dividends during the lean times and then make a full recovery.
Sometimes I'll take a leap of faith, but not before taking a long, hard look at the firm's balance sheet obligations, projected income, and larger industry fundamentals.
In this case, I'm keying in on companies with double-digit earnings growth forecasts in 2018.
These businesses were able to successfully cover their dividend payments in 2017, and they're expected to haul in significantly more (up to 96%) profit this year. So without knowing anything else, they stand a pretty good chance of maintaining their high payouts.
Here are some of the standouts.
One Stands Above The Rest
There is no ironclad test for dividend sustainability. Even in years when a company's GAAP (generally accepted accounting principles) profits are up, it's possible for operating cash flows to decrease. And even if cash flows are also rising, there could be new capital obligations on the horizon, or perhaps a large debt maturity coming due.
Still, if the companies in the table above were able to maintain dividends last year, there's a good chance they will be in a financial position for even stronger distribution coverage this year.
That's the case for Sunoco (NYSE: SUN). After posting a net loss of $0.09 per share in 2017, the gas station owner is expected to swing to a hefty profit of $2.35 per share in 2018. But of the 14 analysts who follow the company, earnings estimates range as low as $1.22 and as high as $3.35 -- so there is a high degree of uncertainty.
Still, even the lowest outlook would be a big improvement from last year. Maybe that's why the stock is close to a new 52-week high.
Sunoco owns and operates more than 1,300 convenience stores around the country and supplies fuel to thousands more third-party wholesalers. The company is looking to exit the retail game and has signed papers to sell most of its stores to 7-Eleven for $3.3 billion in cash. This agreement will not only provide a fresh influx of capital, but also calls for Sunoco to supply 2.2 billion gallons of fuel annually to these same locations over the next 15 years.
As it stands, the company generated $132 million in distributable cash flow (DCF) last quarter, covering its 10.3% yield with a comfortable distribution coverage ratio of 128%. This deal with 7-Eleven will remove a great deal of day-to-day revenue volatility, while ensuring steady future cash flows thanks to the 15-year fuel supply agreement.
Given all of these factors, SUN has earned a spot on my watch list for my High-Yield Investing premium newsletter.
This Is Just A Start
The goal of my double-digit stock screen is to identify stocks that might be well-suited for my High-Yield Investing portfolio. But like any quantitative tool, this screen should not be used in isolation. You should also evaluate the fundamental characteristics of every potential investment opportunity. In addition, you should assess how well a particular stock or fund matches your investment needs. And do your own due diligence on a security to decide if it is right for your portfolio.
If I find a real gem within these screens, a stock that can actually maintain this level of yield through the years to come, my High-Yield Investing subscribers will be the first to hear about it.
So if you'd like to join us in our search for the best high yields the market has to offer, then I want to invite you to learn more about High-Yield Investing. You don't have to settle for the paltry yields offered by most stocks. The high yields are still out there. You just have to know where to look -- and my staff and I are here to help you along.