3 Massive Yields I Just Might Buy
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m always on the lookout for the next high flyer, but more often than not I’d like to take a flyer in a high yielder instead. I’m building out a virtual portfolio of high yielders and reinvesting the income they kick off into those high flyers. I call this endeavor the “No Drip, No Mess” Portfolio and here are three massive yielding stocks that I’m currently considering.
Oaktree Capital (NYSE: OAK) is one of the premier distressed debt asset managers. The company was co-founded by Howard Marks, who has a 25-year track record of success of averaging 23% annualized returns. Best of all the company’s units yield a very enticing 7.8%.
I do have two concerns before I make an investment. First, their financials are very complex, so much so that it appears that they don’t turn a profit. Second, and more of a shorter-term concern is the global economy. Distressed investments tend to become more distressed during downturns, which of course will lead to additional opportunities for the company. I’d like to get a better handle on their financials before I commit any capital as I don’t want to invest in anything too complex to understand.
The real question I need to answer is how I want to invest in the debt markets. The other direction I could go in is by investing in a mortgage REIT like Annaly Capital (NYSE: NLY), which only invests in AAA-rated government-backed mortgages. Like Oaktree you’re investing in the management team to keep producing an oversized yield. In Annaly’s case that yield is still over 11% even after several cuts over the past year. The question I need to answer is if over time the distressed market will be the better and more stable performer.
StoneMor Partners (NYSE: STON) is one of the more unusual companies out there. They own and operate 276 cemeteries and 85 funeral homes throughout the US. They are in the business of consolidating the sector as well as operating the assets already owned.
Sounds simple enough but their structure as an MLP makes their financials anything but easy to understand. What is easy to understand is the company pays out a massive 10.29% distribution that they plan to maintain through the end of this year and then grow in the future.
The biggest concern from StoneMor isn’t from their operations but from attacks from short sellers. They say that the yield is unsustainable and the result of accounting trickery instead of operational excellence. It is true that on an operational basis this yield is a stretch, but cemeteries are structured as such that a portion of sales go into trust funds that earn income, which can be distributed as products and services are delivered. Having previous personal experience overseeing their management I have a more practical understanding than most short sellers.
However, the financials are indeed complex and if short sellers damage the company’s reputation too much they’ll be unable to access the capital markets at fair prices. That’ll all but put to death their growth by acquisition strategy. Management is fighting back to ensure their survival but must do a better job communicating their message to investors.
Terra Nitrogen Co. (NYSE: TNH) is not your typical MLP that consistently pays a consistently growing distribution. They are one of the leading nitrogen fertilizer manufactures in the country through a single facility in Oklahoma. Their general partner is wholly owned by CF Industries (NYSE: CF), which is a leading global nitrogen and phosphate manufacturer. This means that in addition to having full control over their business they are also a much more diversified company than Terra. Still, Terra yields almost 8% currently while CF’s payout is less than 1%.
In looking for investments in the future of food, Terra’s business is one that should prosper over the long term. However, they own but one facility, their business if affected by nitrogen fertilizer selling prices and natural gas prices, all of which leads to volatile quarterly distributions. The real question is if I want to stomach this volatility and if the general long-term trend of the distribution is heading higher.
All three companies have their pitfalls and potential. That’s to be expected when investing in the higher yield market as you’re not exactly investing in blue chip companies. I’ll keep watching these high yielders until I’m comfortable enough to publicly stand behind one of them.
Do you have a high yielder you think is worth taking a look at? Sound off in the comment box below.
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latimerburned owns shares of Annaly Capital Management and StoneMor Partners. The Motley Fool owns shares of CF Industries Holdings, Annaly Capital Management, Oaktree Capital, and StoneMor Partners. Motley Fool newsletter services recommend StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.