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Got $5,000? Buy and Hold These 3 Value Stocks for Years.

Motley Fool - Mon Feb 26, 4:15AM CST

The stock market has been on an impressive run over the past year. The S&P 500 is up 27%, while the tech-heavy Nasdaq 100 has surged nearly 50%. That rally has most stocks trading at lofty valuations. The S&P 500's price-to-earnings ratio is over 22, while the Nasdaq 100's is above 30.

Despite those blistering rallies, there are still some compelling values. Kinder Morgan(NYSE: KMI), Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP), and W. P. Carey(NYSE: WPC) stand out as great value stocks to buy and hold right now. They could turn a $5,000 investment into an attractive and growing income stream. On top of that, they have compelling appreciation potential as they increase their cash flows and the market starts valuing these high-quality companies higher.

A bottom-of-the-barrel valuation

Kinder Morgan generates very stable cash flow backed by long-term contracts and government-regulated rate structures. The natural gas pipeline giant expects to produce nearly $5.1 billion, or $2.26 per share, of distributable cash flow (DCF) this year. With shares currently trading at around $17.25 apiece, it sells for 7.6 times its cash flow. That's absurdly cheap.

The pipeline company's low valuation is the main driver of its monster 6.6% dividend yield (one of the highest in the S&P 500). Every $1,000 invested into Kinder Morgan would generate $66 of annual dividend income at that rate.

Kinder Morgan only pays out about half of its stable cash flow in dividends. It uses the rest to invest in high-return expansion projects, maintain its strong balance sheet, repurchase shares, and make acquisitions. The company recently closed its roughly $1.8 billion acquisition of STX Midstream, which, along with organic drivers, will help grow its DCF per share by 8% this year. Meanwhile, the company has about $3 billion of high-return expansion projects currently under construction, giving it the fuel to continue growing its cash flow. That growing cash flow will provide Kinder Morgan with more power to increase its dividend (it has raised the payout for seven straight years, including by nearly 2% this year) while also driving a steady increase in its share price. Add that growth to its high-yielding dividend, and it could produce double-digit total returns from here.

Growing increasingly cheaper

Brookfield Infrastructure grew its funds from operations (FFO) by 10% last year to $2.95 per share. With shares recently around $35.50 apiece, the infrastructure giant trades at about 12 times FFO. It's even cheaper when factoring in the acceleration in its FFO during the fourth quarter after closing several acquisitions. Its annualized year-end run-rate of $3.16 per share pushes its valuation multiple down to 11.2.

That cheap value is why Brookfield currently offers a 4.6%-yielding payout. Brookfield pays out a conservative portion of its stable cash flow in dividends (60%-70% each year). That enables it to retain cash to invest in new income-producing infrastructure projects. The company is currently building several data centers, semiconductor fabrication facilities, and other infrastructure worldwide. Those investments and the growing cash flows of its existing portfolio should fuel 6% to 9% organic FFO per share growth.

Brookfield complements its solid organic growth rate with its value-enhancing capital recycling strategy. It routinely sells mature assets and reinvests the proceeds into higher returning opportunities. The company believes M&A should help drive double-digit FFO per share growth. That should give it the fuel to grow its high-yielding dividend by 5% to 9% per year. That combination of growth and income could help power double-digit total annual returns.

Repositioning to reaccelerate

W. P. Carey is currently in the middle of a transitional phase. The diversified REIT made the strategic decision to exit the office sector last year. As a result, it reset its dividend to better align with its lowered earnings baseline. The company currently expects to generate $4.65 to $4.75 per share of adjusted FFO this year.

With shares of the REIT recently trading at around $56.50, it sells for 12 times its FFO at the midpoint of its guidance range. That's cheaper than the broader market and its REIT peers. W. P. Carey hopes that its office exit will help narrow the valuation gap by shedding assets that were weighing on its growth and value.

W. P. Carey expects its adjusted FFO growth rate to reaccelerate as it redeploys its office sales proceeds into higher-return new investments. The REIT's focus has been on investing in the industrial sector, which is benefiting from robust demand. That's enabling it to capitalize on higher rental growth rates. W. P. Carey expects to start increasing its reset dividend as its earnings grow.

However, despite a lower rate, the REIT still yields an attractive 6.1% because of its dirt cheap valuation. That higher-yielding payout, along with reaccelerating adjusted FFO growth, should help W.P. Carey deliver strong total returns in the future.

Compelling value propositions

Kinder Morgan, Brookfield Infrastructure, and W P. Carey trade at low values these days, offering compelling dividend yields and enticing total return potential. They're great value stocks to buy and hold right now.

Should you invest $1,000 in Kinder Morgan right now?

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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, Kinder Morgan, and W. P. Carey. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners and W. P. Carey. The Motley Fool has a disclosure policy.

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