Sage Investment Club

PM Images By Valuentum Analysts Certificates of deposit at well-known online banks are now approaching 5%, and that means that equity income investors will likely need to get paid a higher yield than that in order to take on the additional risk that comes with owning volatile stock investments. In many cases, the near risk-free yield of a certificate of deposit may be the best risk-adjusted asset out there today, especially if investors are only evaluating equities for the size of their dividend yield and chasing poorly-covered payouts. The higher the dividend yield, it is often the case that the riskier the stock. In this article, however, let’s talk about three stocks that are yielding north of 8% that have raised their dividends in each of the past 10 years. They are mighty risky, but they’ve managed to raise the payout for at least a decade now. Let’s dig in. Altria Group (MO) Altria has raised its dividend in each of the past 10+ years. (Image Source: Altria) Altria is a name that has a lot of hair on it these days, with the negative stigma of smoking coupled with some poor deal-making the past few years, particularly with respect to JUUL, of which Altria has written down considerably. The company’s dividend yield of ~8.5% speaks of tremendous risk, in our view, but Altria has battled through challenges for all of its corporate life. In its third-quarter earnings release, issued in late October, Altria continues to work toward its journey of “Moving Beyond Smoking,” but the transition has been painful and continues to be very painful. Net revenue fell 3.5% in the quarter, and while adjusted earnings per share edged up in the period, the company narrowed its adjusted earnings per share for the year to the range of $4.81-$4.89, which is a growth rate of just 6% at the high end. Though the rate of earnings growth isn’t necessarily keeping up with the pace of inflation, Altria continues to be shareholder friendly. In the third quarter of 2022, the company bought back millions of its shares and it paid $1.6 billion in cash dividends. Last August, the firm raised its dividend for the 57th time in the past half century or so, and that’s quite the track record. But let’s look hard at the numbers to get a better feel for the risks. For the first nine months of 2022, total cigarette volume fell 9%, as volumes in its Marlboro brand dropped 8.4%. Not good. The company also has a significant net debt position, as the combined total of long-term debt of $24.8 billion and short-term debt of $1.4 billion was far greater than the $2.5 billion in cash and cash equivalents at the end of September 2022. Free cash flow through the first nine months of $5.49 billion was down on a year-over-year basis, but still it handily covered its cash dividends paid of $4.9 billion over the same time period. Altria has some financial flexibility with its equity stakes in Anheuser-Busch InBev (BUD) and Cronos Group (CRON), but things are starting to get a bit tight for this ~8.5% dividend yielder. Cigarette volumes are collapsing, earnings growth isn’t keeping up with inflation, free cash flow has fallen during the first nine months of 2022, its net debt position is large, and litigation headlines remain a concern. However, as long as Altria can continue to drive free cash flow in excess of cash dividends paid, income investors might be okay. Altria is one very risky income idea, nonetheless. Magellan Midstream Partners (MMP) Magellan has raised its dividend in each of the past 10+ years. (Image Source: Magellan) We continue to be cautious on the master limited partnership business [MLP] model. But why? Well, more generally, most pipeline energy MLPs have traditionally had huge net debt positions and have had trouble generating traditional free cash flow, as measured by cash flow from operations less all capital spending, in excess of their cash distributions paid. Magellan Midstream, for example, had long-term debt of $5.0 billion versus cash and cash equivalents of $8.1 million at the end of September 2022. However, during the first nine months of 2022, Magellan’s free cash flow generation was $659.2 million, which was greater than the $655.3 million in cash distributions paid over the same time period. Though we’re cautious on Magellan’s huge net debt position, its traditional free cash flow generation has covered its cash dividends paid during the first nine months of 2022, and that’s something to be encouraged about, in our view. As long as free cash flow generation remains in excess of cash dividends paid, the MLP has a fighting chance of preserving and continuing to grow its lofty payout. When Magellan reported its third-quarter results in late October, it beat consensus estimates and raised its guidance for the remainder of 2022. During the first nine months of 2022, the MLP bought back more than $375 million in its stock, and its new capital project to expand its West Texas refined products pipeline looks promising. In the company’s press release, Magellan expects expansion capital spending to be $100 million in 2023 and $40 million in 2024, which is manageable. Though MLPs are very risky, in our view, Magellan seems to be among the better positioned financially, and its ~8% distribution yield may be worth a look. CTO Realty Group (CTO) CTO has raised its payout in a material way the past 10 years. (Image Source: CTO Realty) We’re cautious on real estate investment trusts [REITs] as interest rate hikes during 2022 increased cap rates, and the REIT sector faced considerable pressure as a result. REITs are a popular area of reading on Seeking Alpha, as most pay lofty dividend yields, but it’s important to note that the dividend is capital appreciation that otherwise would have been achieved had the dividend not been paid. That’s in part why the S&P 500 (SPY) is up nearly 160% during the past 10 years, on a price-only basis, while the Vanguard Real Estate ETF (VNQ) is up only ~25%, according to data from Seeking Alpha. That dividend reduces capital appreciation that otherwise would have been achieved. Warren Buffett understands this and hasn’t been a big believer in Berkshire Hathaway (BRK.A) (BRK.B) paying a dividend for an important reason. It can invest that money in future businesses to drive even more capital appreciation and further compound shareholder capital. In any case, CTO Realty Group is a rather small REIT with a market capitalization of just over $400 million, and as with many other REITs, it is capital-market dependent. This means that it often has to tap the markets whether through new equity or new debt to keep operations going and paying its dividend. Among the three companies highlighted on this list, we’d view CTO Realty as the riskiest one with the greatest threats to its payout. REITs could face a lot of pressure in 2023 and 2024 given where interest rates are going. CTO Realty Group has a multi-tenant portfolio, but it is focused on retail-based units, which may not be the best place to be in the long run as e-commerce proliferates and consumers become more accustomed to ordering things online and breaking open those Amazon (AMZN) boxes. The REIT’s core funds from operations guidance is targeted at $1.71-$1.74 per share, which implies considerable year-over-year growth. CTO Realty’s ~8.3% dividend yield may be far from the safest on this list, but the company’s forward estimated dividend payout of $1.52 per share is covered by its core FFO, and that’s a good thing. Concluding Thoughts This list of companies is a risky one. We have a company in Altria that is facing permanent declines in its legacy cigarette business, and free cash flow is slowing, even though free cash flow still covers cash dividends paid. We have an MLP in Magellan, which while covering cash distributions paid with traditional free cash flow, has a huge net debt position, and then there’s a retail-focused REIT that is rather small in terms of market capitalization and is heavily tied to headwinds from rising interest rates. These three ideas are not without substantial risk to both their share prices and dividend/distribution payouts, but they’ve managed to drive payout expansion for the past 10 years and currently yield north of 8%, which is meaningfully higher than online certificates of deposits these days. The higher the dividend yield, the higher the risk, in our view, but we hope you enjoyed our work. Don’t forget to follow us on Seeking Alpha! This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice.

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