Retirees and income investors love stocks with high dividend yields. These will create cash flow each quarter, and a 4% yield is a great return in today's market. However, investors need to make sure that they aren't chasing high yields from risky stocks that the market is justifiably avoiding. Instead, investors can focus on high-quality companies with stable outlooks and healthy dividend yields.
The following three stocks fit that description, and they might be great additions to an income investor's stock portfolio.
Phillips 66 Partners
Phillips 66 Partners (NYSE: PSXP) is a master limited partnership (MLP) that was initially formed to manage the midstream assets of Phillips 66 (NYSE: PSX). Midstream assets include energy pipelines, storage facilities, and terminals. Phillips 66 Partners owns and operates a network of equipment and facilities that engage in the transportation, processing, and storage of crude oil and natural gas liquid. These are essential for the movement of oil and gas from the locations where they are sourced to refineries operated by Phillips 66.
Share prices for energy sector stocks were rocked last year by tumbling crude oil prices and the global pandemic and have not yet recovered fully. MLPs are an interesting case in that context. They are organized to return cash to shareholding partners, which is made possible by their relatively stable financial results. Midstream operators generally charge fees based on the volume transported and stored, whereas other energy companies' results are reliant upon the prices of the materials they produce and sell.
The volume of crude oil produced in the U.S. still has not rebounded to pre-pandemic levels. However, production has stabilized as prices have crept higher. Results for Phillips 66 Partners have also stabilized. For full-year 2020, the MLP reported $970 million in distributable cash flow, which was a 2% drop from 2019 and 14% higher than 2018. By comparison, the company paid out $837 million in dividends to unitholders in 2020. Phillips 66 Partners has not changed its quarterly distribution since last year, and it currently pays an 11.5% forward dividend yield. That's a great return for investors and builds in a huge amount of downside cushion.
If U.S. petroleum production remains even somewhat stable, then Phillips 66 Partners should continue generating great income returns for unitholders. A sharp rise in travel and manufacturing over the next one to two years as the economy springs back to life would also be very bullish for this MLP.
STORE Capital (NYSE: STOR) is a REIT that owns a portfolio of 2,600 properties that are leased by a variety of tenants. These tenants operate in diverse businesses, including furniture stores, education centers, building materials distributors, movie theaters, and outdoor goods retailers. Master leases make up 94% of the company's lease revenue, meaning that these agreements are negotiated and serviced for multiple locations on a corporate basis. That provides a more efficient approach for management.
The pandemic was terrible for many brick-and-mortar businesses, and some changes to consumer tastes and remote corporate activities have probably created permanent damage to demand for commercial properties. Still, STORE's revenue for the most recent quarter was almost identical to the corresponding period in 2019. For full-year 2020, the REIT reported adjusted funds from operations (AFFO) of $1.83 per share, which was down year over year. Those cash flows were nonetheless more than enough to cover the $1.44 per share that was distributed in 2020.
STORE provided guidance for next year, and management expects AFFO to rise 3% to 5% in 2021, mostly due to acquisitions. That means that its 4.2% dividend yield should be comfortably sustainable. As the economy reopens and consumers return to stores, STORE's dividends should become even more secure.
Sabra Health Care
Sabra Health Care (NASDAQ: SBRA) is a REIT that owns more than 400 healthcare facilities primarily engaged in skilled nursing and eldercare. These are located all over the U.S. Such hospitals and care facilities aren't immune to recessions, but they do offer some resistance. Regardless of economic conditions, some people require rehabilitative and nursing care from medical professionals. As the number of senior citizens in the U.S. rises, demand for the services rendered by Sabra's tenants will also increase. Many of these patients are also covered by federal and state healthcare plans, which provide a reliable source of cash flows partially passed along to Sabra.
COVID-19 did result in lower occupancy rates, which negatively impacted earnings. However, total revenue only declined 2.5% year over year in the most recent quarter, which is a strong sign of recovery from earlier disruptions. The company's AFFO of $1.74 per share make the $1.20 annual dividend and 6.5% yield both look rather secure. The company has prioritized building liquidity on the balance sheet, and guidance calls for roughly $0.40 in FFO for the first quarter of 2021. Those are both great signs for income investors looking to capitalize on recovery from the global pandemic.
10 stocks we like better than Phillips 66 Partners
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Phillips 66 Partners wasn't one of them! That's right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of February 24, 2021