Secure Your Income Stream: High-Yield Dividend Safe Stocks

One of the most common rules of thumb in investing is that unusually high dividend yields often indicate equally high levels of risk. While this is true in many cases, there are always exceptions.

 

In today’s market, high volatility levels have brought the yields of certain stocks well above their historical ranges, even though there is little danger of lower future payouts.

 

Here are three high-yield dividend stocks that are forecast to be relatively safe, despite their unusually large income potentials.

 

Antero Midstream (NYSE:AM) is a midstream energy services company. The company manages gathering pipelines and compressor stations, making it a critical supplier of specialized midstream gas infrastructure. Antero also operates freshwater pipeline infrastructure to service its drilling and well development operations.

 

Antero yields an impressive 8.72 percent, paying $0.90 per share annually. Although Antero had to cut its dividends in 2021 to cope with the effects of the COVID-19 pandemic, the company has avoided further cuts in 2022.

 

Management has not raised the payout since it was cut, but Antero’s extremely high yield provides decent returns without further dividend increases.

 

Arguably Antero’s biggest advantage is its use of fixed-fee contracts. This allows Antero to predict its own forward cash flow with minimal chances for error. As a result, management can set the company’s dividend payout on the basis of reliable future cash flows.

 

This unique facet of Antero makes it one of the safer midstream dividend stocks. The ability to predict future cash flows particularly reduces the risk of Antero’s dividend payout ratio, which currently sits at over 130 percent.

 

Due to high energy prices, companies like Antero will likely continue to thrive for the foreseeable future. While energy prices are expected to fall slightly in 2023, companies engaged in the oil and gas market will likely continue to generate attractive profits and cash flows. The continuation of the Russia-Ukraine war will most likely keep prices above their pre-pandemic levels for some time to come.

 

The effect of higher energy prices on Antero’s growth is readily visible in its Q3 earnings report. Free cash flow before dividends increased 47 percent year-over-year, even though the volume of natural gas the company processed fell 4 percent. Even if prices drop in 2023, Antero is likely in a good position to perform well due to its fixed-fee contracts.

 

PennantPark Floating Rate Capital (NYSE:PFLT) is a publicly traded business development company that invests in mid-sized businesses. PennantPark provides these companies with a source of capital to drive their growth and earns significant interest on its loans in the process.

 

At 10.10 percent, PennantPark is one of the few stocks in today’s market offering double-digit yields. Each share of PennantPark pays $0.60 annually.

 

Like Antero, PennantPark did have to cut its dividend significantly in 2020. Since then, however, the distribution has been rising steadily and is now approaching its pre-pandemic levels.

One of the key reasons that PennantPark’s dividend is safe is the fact that the company loans money on a variable-rate basis. In today’s rising interest rate environment, this represents a huge advantage in terms of generating revenue.

 

In addition to its enormous dividend yield, PennantPark is also expected to see its share prices rise over the next 12 months. Analysts currently expect the stock to appreciate from its current price of $11.43 to a median target price of $12.75. This would represent a gain of 11.5 percent. When paired with the stock’s yield, investors could see total returns of up to 25 percent if analyst price projections prove to be accurate.

 

A final argument in PennantPark’s favor is the fact that the stock trades at a fairly attractive value. PennantPark is currently priced at just 7.5 times forward earnings and 0.65 times its book value. Taking its dividend into account, this makes PennantPark a potential value buy as well as a good source of income in your portfolio.

 

Like Antero, Enterprise Products Partners (NYSE:EPD) provides midstream services to the oil and gas industry. The company operates multiple pipelines, 19 natural gas processing centers, NGL storage facilities and a fleet of over 250 transportation trucks. This gives EPD broad exposure to the natural gas market.

 

EPD currently yields 7.78 percent and pays $1.90 per share annually. Unlike the other two high-yield stocks listed here, however, EPD did not cut its distribution during the COVID-19 pandemic.

 

The company has been steadily raising its dividend for 24 consecutive years. Thanks to its greater ability to maintain its payout during downturns, EPD likely stands as the safest among itself, Antero and PennantPark.

Through much of the 2010s, EPD yielded between 4 and 6 percent. Since 2020, however, the stock’s yield has moved into a much higher range, giving investors a rare opportunity to earn relatively safe returns in the high single digits. As such, an argument could be made that the stock is somewhat undervalued at today’s prices.

 

Although EPD offers a slightly lower dividend yield than Antero or PennantPark, its total return could be higher in the coming year. Analysts expect EPD to rise by an average of 27 percent over the next 12 months, potentially generating total returns of over 30 percent once the dividend is taken into account.

 

In Q3, EPD generated $1.9 billion in distributable cash flow, covering its dividend obligations by 1.8 times. In the same quarter, the company achieved new volume records for processing, indicating a high demand for its services.

 

Given that the energy market is likely to remain tight for quite some time, EPD seems to be in an excellent position to continue raising its dividend and rewarding shareholders with a reliable income.

 

As you can see, each of the stocks listed here comes with its own advantages and disadvantages. While all of these companies offer higher-than-average yields and are estimated to be fairly safe, investors should still carefully consider how these stocks will fit into their portfolios.

 

For most investors, EPD is likely the best single choice due to its combination of dividend safety and total potential return. Investors who want to focus more on short-term income, however, may prefer PennantPark for its additional yield.

 

Those wanting a more diversified income portfolio may also prefer to combine two or more of these stocks. Buying Antero and EPD, for example, would provide you with broad coverage within the energy sector.

 

PennantPark and one of the midstream stocks, on the other hand, would offer diversification across two loosely correlated sectors.

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