This is a guest post by Tom Hutchinson, Chief Analyst, Cabot Income Advisor
Stocks have soared at an amazing pace over the last year. A promising environment of a booming economy complemented by trillions in stimulus still lies ahead. But how much of that wonderful news is already priced in?
While stocks may well trend higher over the rest of the year, it is unlikely the recent remarkable pace higher can last. The easy money and sky-high returns of the earlier recovery may be over. But the party for income investors is still going strong.
You can still find short-term high-yield investment opportunities that haven’t existed in a decade.
Despite the cyclical stock rally over the last several months, many stocks in the energy and financial sectors are still well below their pre-pandemic levels. In fact, some of the highest-yielding stocks on the market still haven’t recovered from the pandemic. And yields are still sky-high.
You can find yields of 6%-7% and even higher on stocks with good momentum and a positive outlook over the remainder of the year. These kinds of yields haven’t been around since 2010, when stocks were still depressed from the financial crisis. Those yields didn’t last, and neither will these.
The kind of income return still afforded by the current environment is nothing to sneeze at. The benchmark 10-year Treasury bond is still paying just 1.64%. An AAA-rated 20-year municipal bond is paying 1.35%. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) yields just 2.65%.
Locking in an income return of 6% or 7% in this income-challenged environment is a coup. But the opportunity won’t last much longer. Let’s grab some fat yields while we still can.
Here are two reliable dividend stocks that yield more than 7%.
AGNC Investment Corp. (AGNC)
- Yield: 7.9%
AGNC is a mortgage real estate investment trust (mREIT) that invests predominantly in U.S. government-backed residential mortgages. It pays a high dividend yield, currently 7.9%, and makes dividend payments on a monthly basis. As a result, AGNC is a monthly dividend stock.
While typical REITs own actual physical real estate properties, charge rent, and pass that income onto shareholders, mortgage REITs are a different animal. They buy mortgages and generate income from monthly mortgage payments. A mortgage REIT borrows money at low short-term rates and uses that money to buy mortgages that pay a higher interest rate, making a profit on the difference in rates, or the net interest spread.
AGNC invests almost entirely in mortgages backed by Fannie Mae and Freddie Mac, so there is virtually zero credit risk. However, there is certainly interest rate risk. It’s all about the spread. If the difference between the short-term rates at which it borrows money and the mortgage interest paid increases, so do the profits.
There are good times and bad times to own these securities. I believe now is a very good time.
With longer-term rates and mortgage rates rising and short-term rates staying the same, the net spreads and profits at AGNC are likely to climb. In fact, the spread has already been climbing: The spread has consistently increased from 1.3% in March of last year to 2.6% in the first quarter. The stock has also been consistently climbing for the past year, but it is still a long way from pre-pandemic levels.
A fat yield with a good prognosis for the stock price should make AGNC a big winner for income investors.
For a more detailed analysis of AGNC click here.
Enterprise Product Partners (EPD)
- Yield: 7.5%
Enterprise is one of the largest midstream energy Master Limited Partnerships (MLPs) in the country. You can see Sure Dividend’s complete MLP list here.
It has a vast portfolio of service assets connected to the heart of American energy production. It has $36 billion in annual revenues from an unparalleled reach in the industry that is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities as well in the Gulf of Mexico.
The key feature of this business is that it’s very stable, sort of like an energy utility. Earnings are not dependent on the movement of volatile oil and gas prices. It’s like a toll collector that charges fees for services of piping and storing oil and gas. In fact, 88% of earnings are fee-based and backed by guaranteed contracts.
The stock got creamed as demand for oil and gas fell off a cliff during the pandemic lockdowns. EPD fell 40% from right before the pandemic to early November. But that crash was mostly in sympathy with the rest of the sector, as many commodity price-dependent companies had crashing profits.
Enterprise’s profits only declined about 10% for the year, in one of the most challenging years ever for the industry. Now, the stock is moving back up. EPD is up 36% since the vaccine announcement in early November. But it’s still around 30% below pre-pandemic price levels.
Oil and gas prices are moving higher and energy demand is clearly picking up. As well, demand, and consequently volumes, through Enterprise’s systems are highly likely to increase as the economy opens up more. This should be a fantastic income stock for the rest of the year at least.
