8 Dividend Picks With at Least 8% Yields and Projected Upside for 2020

February 13, 2020 by Jon C. Ogg

It may sound old to read that investors love dividends. That is something the public is just going to have to learn to deal with. There is a broad and general statement that dividends also account for one-third to half of all shareholder returns over time. With Treasury yields being handily under 2% on all but the longest maturities, many Americans rely on dividends to supplement their retirement and their daily lives.

There are many types of dividends for investors to choose from. There are real estate investment trusts (REITs), Dow Jones industrials stocks, the so-called aristocrats with 25 years of hikes, utilities, partnerships and business development companies, and there are even some closed-end mutual funds to consider.

24/7 Wall St. has tracked many dividend trends over time, but in a low interest rate environment some investors need to pay close attention to the companies and entities with dividend yields that would be considered high in any of the interest rate environments seen over the past 20 to 25 years. After screening out the companies with a market cap of less than $2 billion, roughly 60 traded primary-listed U.S. entities have a yield of 8% or more, and some yields even go well above 10%.

Investors need to do some serious homework before blindly trusting a high dividend yield of 8% or more. It’s hard enough to trust yields over 5% in very well-known and established companies, now that the bull market and economic recovery is more than a decade old. This is a time to put pencil to paper (or financial data into a spreadsheet) to weed out the potential losers from the winners.

First, not all dividends are created equal. Some dividend payers use extraordinary items such as asset sales, while some use cash flow. Some companies and entities use leveraged borrowing to fund their payouts, and some entities use their cash reserves on the balance sheet. There may be no way to know for sure if a company that is being overly generous in its payouts needs to be more modest and lower their payouts, but there are some strategies investors can focus on to make sure that they are not jumping into the next dividend trap.

We have evaluated roughly 60 different entities with high payouts. On top of a $2 billion market cap minimum, we have looked for companies with stable to steady payouts, and we have screened out some entities that looked questionable. We have also chosen a limited number of companies and entities from each sector to offer a broader view of the super-high dividend universe. Trading commentary and color also has been added on each, and each entity listed here was given preference over others if they had upside to the consensus analyst target price from Refinitiv, if they were not a fund or related entity.

Ares Capital Corp. (NASDAQ: ARCC) is a business development company (BDC) that specializes in working with middle-market companies in various industries and sectors. The BDC recently announced a $0.40 per share dividend, but that was two cents per share lower than the payout in prior quarters.

At around $19.10, Ares Capital shares recently put in a high of $19.33, and the consensus target price was $19.63. The new $1.60 annualized dividend would equate to a yield of nearly 8.4%, but the prior dividend notes had included an “additional dividend” of two cents per share in the prior quarters. Its portfolio ended 2019 with 354 investments (up 10 from a year earlier) with a weighted average yield of debt at 9.7% at fair value and a weighted average yield on all investments of 8.7%. Both of its weighted average yields were lower than the prior year. The fair value of its portfolio investments was $14.4 billion at year-end, and the company claimed to have expanded its net asset value per share while maintaining a stable credit quality and having strong dividend coverage.

The most recent analyst coverage was an initiation from RBC Capital Markets last November. The firm started it as Outperform with a $20 target price.

DoubleLine Income Solutions Fund (NYSE: DSL) is a closed-end bond mutual fund that invests in fixed income markets internationally in a broad category of fixed income instruments. Its shares have surged since September, and they seem to have ignored or been immune to any effects of the coronavirus so far. With a recent price of $21.00, it was last seen at a premium to its net value by about 4%, and it has close to a 40% turnover ratio, so its holdings change over in an average of two and a half years or so. The fund also comes with a current normalized dividend yield of roughly 8.6%. As with many closed-end funds, the returns have been juiced up with roughly 30% leverage in the fund’s portfolio.

What is interesting about the DoubleLine Income Solutions Fund is that its yield has been the same $0.15 that it paid out monthly since inception in 2013. It has added some occasional juice by distributing something extra at the December payments. The fund also invests in junk bond sectors internationally, and some securities are even not rated. If size matters, the DoubleLine Income Solutions Fund also has over $2 billion in assets under management, with a net asset value annual return of roughly 6% per year since inception.

To show just how diverse the fund is, note that the DoubleLine Income Solutions Fund holdings were shown to be over 44% in emerging markets, about 21% in high-yield corporates, almost 8% in bank loans and over 26% in mortgage-related and pooled products. Also worth noting is that about 45% of the fund has a duration of zero to three years and another 25% or so has a duration of three to five years.

Macquarie Infrastructure Corp. (NYSE: MIC) owns and operates businesses that serve other businesses and governments with international tank terminals for chemicals and energy products, aviation fuel delivery and many airport/plane services, as well as multiple energy services throughout parts of Hawaii. With shares trading at $44.00, its $4.00 annualized dividend comes with a 9% yield.

The Macquarie Infrastructure entity saw its quarterly payout drop to $1.00 per quarter back in 2018, and it announced a review of strategic alternatives to unlock shareholder value last October. It entered into a disposition agreement with Macquarie Infrastructure Management (USA), its external manager, and its most recent earnings report showed a 2% decline in total expenses and a 7% decline in adjusted EBITDA. Cash generated by operating activities increased by 30% last quarter to $157 million after current taxes payable as a result of the sale of the company’s portfolio of renewable power businesses.

While its consensus target price is closer to $43.50, Wells Fargo upgraded Macquarie Infrastructure to Overweight and issued a $45 target price in January.

Macy’s Inc. (NYSE: M) has been down and out for long enough that any investor who wants to chase it based only on the dividend yield will have to do it all alone. Macy’s has a very lonely crowd of frustrated and furious shareholders, but at the end of the day, it is a mall-based department store that is failing due to the Amazon and omnichannel apocalypse. Even factoring in a tired store image, much of its woes are hardly its fault alone, and Macy’s is still at least profitable.

The retail giant’s market cap is down to $5.3 billion, and its $17.00 share price and $1.51 annualized dividend make for a dividend yield of better than 9%. The question is whether Macy’s can keep paying out this much with a $2.75 earnings per share estimate for 2020 and a $2.45 EPS estimate for 2021. Many investors are assuming that its dividend is at risk. It is also hard to believe that this was close to a $70 stock back in 2015. Macy’s also has been in a close and shrink mode for some time and has plans to close another 125 stores from 2020 through 2023.

While the focus was on companies with upside to the consensus price target, Macy’s has a $16.19 consensus analyst target. That means that most analysts and investors now are basing returns solely upon the dividend. That said, two analyst upgrades in 2020 have put $18 target prices on the stock. One big question to ask here is if Macy’s has been in this much decline, imagine how harsh it’s going to look when that next recession inevitably arrives.

New Residential Investment Corp. (NYSE: NRZ) is a REIT that invests in and manages residential mortgage-backed securities (MBS) and related assets. At $17.45 a share, it has a $7.3 billion market cap, and the $2.00 per share dividend comes with a whopping 11.4% dividend yield. One issue that may add support is that New Residential’s February earnings report showed that it had a $16.21 book value per common share.

While New Residential is an MBS-REIT, the company is also growing some of its operations around the world of lending as well. Its consensus target price was $18.09, but Nomura Instinet just raised its target price to $20.00 from $18.50 after earnings. Its 50-cent quarterly dividend has been the same payout since 2017, but New Residential did recently launch a $350 million redeemable preferred stock offering.

Its core earnings of $0.51 a share on a GAAP basis was actually $0.61 on an adjusted basis, so some investors may wonder if a dividend hike is in the works. That said, the company’s tax treatment announcement showed that the $0.50 dividend was broken out as $0.3876 per share as the ordinary dividend, with almost eight cents per share coming from long-term capital gains and more than three cents per share coming in form of a return of capital.

NuStar Energy L.P. (NYSE: NS) is in the class of master limited partnerships (MLPs) and the entity dates back to 2001. Its yield-equivalent is about 8.6%. This trades in units rather than common shares, and its quarterly distribution of $0.60 per unit has been the same since it was cut from $1.095 per unit back in 2018. NuStar has a $3 billion market cap, and trading at $27.95, it has a 52-week range of $25.29 to $30.06 that is much more stable than many of the more volatile MLPs that may have a higher distribution.

One concern that investors have in energy-based MLPs, outside of the fact that it distributes oil and gas, is that the payouts each quarter come from distributable cash flow rather than exact earnings per share like a traditional dividend. These also can come with an amped-up payment that includes a return of capital along with income, so there are some tax advantages in some years there.

At the latest earnings date, NuStar said that its distribution coverage ratio to common limited partners from continuing operations was 1.64 times for the fourth quarter of 2019 and just 1.33 times for all of 2019. That means it has ample means to keep that payment going if things remain static. Despite a chart showing that it has lost over half of its value since peaking in 2011, it has experienced a relatively stable chart pattern over the past year compared to many other MLPs. Its units also have traded slightly higher since before its most recent earnings report.

NuStar is based in San Antonio, Texas, and considers itself to be one of the largest independent liquids terminal and pipeline operators out there. The MLP operates in the United States, Mexico and Canada. Its assets are shown to be as follows: 9,900 miles of pipeline and 74 terminal and storage facilities with a combined system with about 74 million barrels of storage capacity.

Park Hotels & Resorts Inc. (NYSE: PK) counts itself as the second-largest publicly traded lodging REIT, with a diverse portfolio of 62 top hotels and resorts with “significant underlying real estate value” that have a combined tally of 34,000 rooms in prime U.S. markets. This has only been its own public entity since 2017, and its dividend has fluctuated due to year-end payouts, and the payout treatments include ordinary dividends and capital gains distributions. At face value, the yield would be over 9%, but we have to see about its 2020 guidance to determine the forward outlook.

Park Hotels & Resorts has a $5.8 billion market cap, and the $23.95 share price comes with a consensus analyst target of $25.75. Its 52-week trading range is 421.67 to $33.02, and the latest recovery is after shares dipped following the termination of its asset management head after having a consensual relationship that was against company policy.

While it operates under the names of Hilton and Doubletree, it has other portfolio names and has not been directly located in many of the areas impacted by the coronavirus so far. Park also carried about $4.1 billion in long-term debt and a total net equity value of about $6.5 billion as of last look. It is unknown just how to view the dividends for 2020 and beyond, but with a discount to the consensus target price and a big sell-off since last April, it would seem that at least some bad news already has been factored in here.

Sabra Health Care REIT Inc. (NASDAQ: SBRA) recently traded at $21.75, with a consensus target price of $22.25. Its dividend yield is 8.3%, and it has paid the same $0.45 per share quarterly dividend since early in 2018. The company had 434 real estate properties held as investments, which are over 300 skilled nursing and transitional care facilities, and the remaining properties are senior housing communities that are owned/leased and other senior housing communities that are operated by third-party property managers. The company also has specialty hospitals and has invested in loans and other financial activity in its target areas.

The REIT pays its dividend from funds from operations (FFO) rather than classic earnings numbers. The company in the third quarter of last year sold an additional 4.2 million shares of common stock to raise about $90 million. That and another $350 million in debt were both used to pay down on maturing debt and under the revolving credit facility. The company claims to continue improving on its leverage, credit metrics and cost of capital. Sabra also claimed to be entering 2020 with the strongest balance sheet since its inception.

In January of 2020, SunTrust Robinson Humphrey lowered its FFO per share estimates based on the above shares sold and the firm warned that near-term earnings growth is likely limited and that the firm is incrementally cautious on the stock to start the year. While the street is higher, SunTrust’s target price is only $20.