Interest rates could be up from lows reached in the middle of last year, when the novel coronavirus pandemic was raging. But since rates haven’t improved too much from these record lows, overall dividend yields on stocks are correspondingly low.
Fortunately, there are compelling exceptions to this standard. Some of the best opportunities income investors can consider today are: Iron mountain (NYSE: MRI), ONEOK (NYSE: OKE), and Asset management Artisan Partners (NYSE: APAM). Here’s a closer look.
Dividend yield: 6.7%
Iron Mountain’s roots are curious, to say the least – its business is based on storing paperwork for organizations that don’t have the space to keep these documents on-site. For example, banks are required to keep signed loan documents, but they are not required to keep these documents right behind the counter.
The company has expanded its offerings since its inception in 1951, adding related services such as document shredding and even secure storage of works of art. It is also suitable for workplace digitization, providing document scanning and data backup services to the cloud, to name just a few items on its more modern menu. Not only are all of these offerings marketable in perpetuity, but its services are cross-marketable. That is, users of one of its services are likely to need another.
That’s not the nuance that makes Iron Mountain such a reliable dividend name, however. The main selling point here is the nature of the business. Organizations pay Iron Mountain an ongoing fee for its services, which are relatively easy (read: inexpensive) to maintain once they’re installed. In other words, there is time and difficulty in getting a load of paperwork into a warehouse where it needs to be put on shelves. Once it’s on that shelf, however, the company’s customers primarily pay Iron Mountain to sit on it.
There isn’t a lot of growth in the business, but there is a lot of steady, predictable cash flow. And because Iron Mountain is structured like a real estate investment trust (REIT), it is required to pay at least 90% of the taxable income to the shareholders. Final result? The company has not failed to pay a dividend in any quarter since the start of 2010.
Dividend yield: 7.2%
Most investors may be familiar with crude oil and natural gas prices fell in the first half of last year, largely on fears of a coronavirus-induced recession. What they may not realize, however, is that demand for gas and oil never really fell significantly. The US Energy Information Administration estimates that global crude consumption fell only 9% in 2020, with much of the contraction linked to logistical hurdles rather than demand issues. The EIA further estimates that US natural gas consumption also fell last year, but only by about 2%.
The data highlights an important reality in the energy market: not all energy stocks are the same. Explorers and producers are extremely affected by the drop in hydrocarbon values, as the cost of drilling and extraction is the same regardless of the selling price of the gas and oil extracted and delivered. The cost of delivering this gas and oil, however, holds fairly stable.
Enter ONEOK, one of the country’s leading natural gas pipeline and processing companies. It is paid per cubic foot for the gas it collects, processes or transports, regardless of the value of that gas at that time.
The resilience of the business is evident in last year’s results. Despite falling gas and crude prices, ONEOK 2020 EBITDA was 6% higher than in 2019 despite the headwind in demand. The company is also calling for a rebound in volumes this year. This move, however, does not necessarily prevent the company from doing so at a later date this year. Maybe more important. ONEOK has not failed to pay a dividend in any quarter since the early 1970s.
Better yet, it can afford to pay the dividends it distributes. While ONEOK’s operating earnings per share have historically been lower than its dividend, in the capital-intensive gas pipeline industry, Distributable Cash Flow (or DCF) is a much more accurate measure of the level of support from ONEOK. a payment. Despite the challenges of last year, the company’s 2020 DCF of around $ 4.38 was more than enough to fund the $ 3.74 dividend. The same story holds for previous years.
Asset management Artisan Partners
Dividend yield: 6.2%
Finally, have you ever heard of the Artisan family of mutual funds? You can also invest in the company that manages them, collecting a portion of the fees it collects each quarter for the assets under the management of the company.
Artisan Partners’ business model is a bit like Iron Mountain, in that the company earns ongoing revenue to provide minimal service to existing clients without necessarily attracting new ones. This is not to say that Artisan does not endeavor to add new investments to its funds, nor to suggest that investors do not regularly close their positions in these funds. Heck, even the ebb and flow of the market affects the value of the investment pools on which the fund company bases its quarterly management fees.
Overall, however, the corresponding cash flow is fairly stable even if absolute growth is not. Indeed, the company has not failed to make a profit in a quarter since its IPO in 2013. This has allowed the asset manager to pay a reliable and healthy dividend every quarter since then, even. if the payment amount has not been paid. I haven’t been completely predictable.
In the meantime, Artisan Partners brings something else to the table: value. Stocks are valued at an acceptable price 15 times earnings in the past 12 months and only 11 times expected earnings per share for the coming year. The share price is also 16% below the current analyst consensus target, opening the door for some price appreciation as investors collect their above-average dividends.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.