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Enbridge, Golar & Macquarie: High Yields for Bottom Fishers

07/12/2018 5:00 am EST


Tim Plaehn

Lead Income Analyst, The Dividend Hunter

For investors searching for higher yields, there is the challenge in analyzing whether dividends are secure or in danger of reduction or elimination, cations Tim Plaehn, income specialist and editor of The Dividend Hunter.

These are often stocks that have dropped significantly in value, and most investors get scared or nervous about jumping on shares where the price has recently gone through a steep decline.

Bottom fishing for high-yield stocks is a more aggressive strategy. The investor must be able to determine if the compay can continue to pay dividends, and there is a need for patience. It can take months or even years for a stock to recover to pre-crash levels.

The good part is that these stocks can pay double-digit yields, which is a nice wage to earn while you wait. Here are three high yield stocks that illustrate the strategy.

The share price of Enbridge (ENB) has recently fallen from almost $41 to a recent $31.30 per share. The 25% decline has pushed the yield up to 6.6%. Enbridge is a large-cap owner and operator of energy liquids and natural gas pipelines across North America.

The stock has fallen due to a current tight cash flow in relation to the dividend, the costs of recent acquisitions, and a legal fight for approval to replace its crude oil pipeline that runs from Canada to the Great Lakes region. The company has a strong plan to work through these issues.

Management forecasts 10% dividend growth going forward after 2018. ENB shares now yield double their four-year average. That means the stock will double to get back close to that average yield.

With the release of its 2018 first quarter earnings report Golar LNG Partners LP (GMLP) dropped from over $20 down to $15. This pushed the yield up from about 11% to over 15%. Golar owns LNG transport ships and floating natural gas processing vessels. In that Q1 earnings, distributable cash flow was well short of the dividend. That scared investors and the stock dropped like a rock.

Golar management has been telegraphing for several quarters that there would be a cash flow shortfall in early 2018 as the company needed time to release some coming off lease vessels. New contracts and an acquisition will bring dividend coverage back above one times by the end of 2018.

Golar has said they plan to continue the current dividend through the two or three quarters of shortfall. This stock will be back in the $20’s when the distributable cash flow is again greater than the dividend.

In February Macquarie Infrastructure Corp. (MIC) cut its dividend by 30% and the stock fell by 42%. Ouch! The company owns a diverse portfolio of infrastructure assets.

At the end of 2017 several customers did not renew leases on some energy product storage terminals. Due to the need to refurbish the terminals to store different products, management chose to reduce the dividend and use the retained cash for that purpose.

Free cash flow is now about 1.5 times the dividend rate, and as soon as the company can lease out the terminals, it will again start to grow the dividend. Investors buying in now earn a 9.4% yield while waiting for growth to resume. I expect MIC to be a $50 stock in 2019 compared to the current $42.

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