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Innovative Industrial Properties(IIPR-N)

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3 Stocks With High Dividend Yields

Motley Fool - Wed Aug 23, 2023

Many companies have put a lower priority on paying dividends over the years. The average dividend yield of stocks in the S&P 500 has fallen from over 3% a few decades ago to less than 2% in the past couple of decades (and recently closer to 1.5%).

However, some stocks stand out for their high dividend yields. AT&T (NYSE: T), Equitrans Midstream(NYSE: ETRN), and Innovative Industrial Properties(NYSE: IIPR) currently offer big-time dividend payments. Here's a look at whether they're solid options for yield-focused investors to consider.

Still high despite the cut

AT&T currently pays a quarterly dividend of $0.2775 per share ($1.11 annualized). That gives the telecom giant a 7.8% yield at its recent price.

AT&T used to pay an even higher dividend. However, it slashed its payout by 46% last year following its split from WarnerMedia as it merged with Discovery to create Warner Bros. Discovery. That freed up cash to invest in its network and to repay debt.

The company's high current yield suggests the market has some concerns that another cut could be forthcoming because debt remains an issue:

A slide showing AT&T's capital allocation update for the second quarter.

Image source: AT&T.

As that slide shows, the company's net debt hasn't improved over the past year. However, it expects free cash to expand in the second half of this year. That should enable it to start chipping away at its debt, putting it on track to reach its targeted leverage ratio by the first half of 2025. While that makes its payout riskier than others, AT&T should be able to maintain its dividend as long as its cash flow doesn't unexpectedly drop.

A clear catalyst on the horizion

Equitrans Midstream pays a $0.15 per share ($0.60 annualized) dividend, giving it a 6.2% yield at the recent stock price. Like AT&T, the pipeline company has cut its payout in the past (by two-thirds in 2020). That enabled it to retain additional cash to fund expansion projects, including its long-delayed Mountain Valley Pipeline (MVP) project.

The company has finally received all the approvals needed to finish building that project, which should enter service by the end of this year. That sets it up to generate meaningful incremental earnings and cash flow starting next year.

It will probably initially use that money to reduce leverage to its targeted level of less than 4.0. That should help improve its credit rating, which currently sits in junk bond territory. Higher cash flow and lower leverage would put the company's high-yielding dividend on a firmer foundation. Those improvements could eventually give Equitrans the fuel to increase its payout.

Growing like a weed

Innovative Industrial Properties pays a $1.80 per share dividend ($7.20 annualized), giving it an eye-popping 9.4% dividend yield at the recent share price. Whereas AT&T and Equitrans Midstream have cut their payouts in the past, Innovative Industrial Properties has steadily increased its dividend. It has grown at a 48% compound annual rate over the last five years, including by 11% over the past year.

However, the industrial REIT's high yield suggests the market believes it might have grown too fast and isn't sustainable. The main factor driving that view is that some of its cannabis tenants are struggling to pay rent. The REIT collected 97% of the rent billed during the second quarter, down from its historical average of 100%. That included applying about $1.5 million of security deposits toward rent, which the company expects those tenants to repay over the next year. Meanwhile, another tenant defaulted on its rent ($2.1 million).

On a more positive note, the REIT generated plenty of income to cover its dividend even with those issues. Though at nearly 80% of its adjusted funds from operations during the second quarter, its dividend payout ratio was at the high end of the comfort zone for a REIT. However, this level is less of a concern for Innovative Industrial Properties because it has one of the lowest leverage ratios among publicly traded REITs. That gives it lots of financial flexibility to deal with tenant issues while it continues to grow its portfolio.

Higher risk high-yield stocks

AT&T, Equitrans Midstream, and Innovative Industrial Properties offer big-time dividends. However, their higher-yielding payouts carry a higher risk of reduction because of some of the issues they face. Income-focused investors need to be comfortable with those risks before adding one of these high dividend payers to their portfolios.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Innovative Industrial Properties and Warner Bros. Discovery. The Motley Fool has a disclosure policy.

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