Exploring High-Yield Dividends

Let’s dive into three dividends that boast an average yield of 12%. For context, I have strong feelings about Wall Street.

It’s important to highlight that the outlook is somewhat optimistic. Sales calls, particularly among S&P 500 stocks, are quite rare. In fact, analysts tend to steer clear of them these days.

Ever thought about buying a call option? There’s a significant number—405 out of 500 stocks, which is 80%!

Interestingly, 81% of S&P 500 companies are genuinely buying back shares. Typically, that’s not the case, but I think right now is different—AI is shaking up business models, and many of these valued companies might be in a tough spot.

Another concern with buy ratings is the lack of growth potential. Often, it seems they’re set up for upgrades, and analysts don’t hesitate to switch their stance from selling to buying.

This is where a savvy investor might sift through the undervalued stocks.

Today, I’m going to touch on three undervalued companies that yield between 6.1% to 15.7%. First up, Prospect Capital (PSEC, 18.7% yield), serves as a cautionary tale, illustrating the difference between being cautious and outright foolish.

PSEC operates as a Business Development Company (BDC) and primarily funds middle-market firms through secured loans. It has a diverse portfolio of 114 companies across 33 sectors and is one of the largest BDCs by market cap, exceeding $1 billion.

Despite being a monthly dividend payer and offering attractive yields, Wall Street seems indifferent. There are only two analysts covering it, and one has set a sell rating. This scant coverage shows how analysts can be reluctant to be critical of those who grant them access.

What’s behind the lack of enthusiasm? Among other issues, there have been three dividend cuts over the last decade, including a 25% drop within a year.

Now, let’s look at another BDC that has a somewhat bearish outlook—BlackRock TCP Capital Corp. (TCPC, 15.7% yield). While technically classified as a sell, most analysts suggest holding onto it, so at least it’s not a complete disaster.

TCPC caters to companies valued between $100 million and $1.5 billion. It currently boasts over 150 portfolio investments in 20 different industries, with a significant portion of its loans being in secured debt (82%) and primarily variable-rate lending (94%).

Managed by a BlackRock subsidiary, TCPC theoretically enjoys a competitive edge due to access to BlackRock’s resources.

However, the pros do raise valid concerns. TCPC is currently restructuring due to credit difficulties, with management fees waived to mitigate some financial strain. Just a few months ago, BlackRock TCP cut its dividend, and while not necessarily facing immediate risk, ongoing portfolio losses could be problematic.

Don’t forget there are other high-yield options to consider.

Cheniere Energy Partners LP (CQP, 6.1% yield) is part of Cheniere Energy (LNG), owning the Sabine Pass LNG terminal in Louisiana. They also control the Creole Trail Pipelines connecting this terminal to various infrastructure.

Cheniere Partners is focused on expanding its facilities but needs to curtail distribution volatility for 2024, particularly considering the decline in performance last year.

While specifics on upcoming projects are unclear, successful execution could lead to a significant increase in cash flow in the coming years.

Now, shifting to a different sector, let’s consider real estate investment trusts (REITs).

Innovative Industrial Properties (IIPR, 14.4% Yield) focuses on the cannabis sector and receives mixed reviews—most professionals suggest holding or selling, though there have been some buybacks pushing up the consensus.

Wall Street seems quite skeptical of this stock. While it bought into the cannabis boom, it also experienced substantial challenges.

IIPR finances the regulated cannabis industry via a sale-leaseback program, acquiring properties primarily used for marijuana cultivation. This cash influx is vital for cannabis companies, giving them the capital to grow while generating consistent income for the REIT. Currently, IIPR holds 108 properties across 19 states totaling around 9 million square feet, leasing to 36 tenants.

Interestingly, IIPR’s growth trajectory ten years ago doesn’t reflect its current challenges—negative cash flows were prevalent back then. It has since improved its position but the stock price has lagged behind actual performance of the business over the years. Regulatory issues state-by-state add another layer of difficulty. Recently, IIPR invested in IQHQ, a life sciences real estate platform, with growth potential.

However, it’s worth noting that funds from operations (FFO) have seen a decline recently, pushing the adjusted FFO payout ratio near 95%, higher than the historical average of 85% from 2017 to 2024.

Disclosure: None