Published Wed, 16 Sep 2020 11:31:03 on Income Investors
Lock in Oversized Yields amid Uncertainty?
Dividend stocks and politics: do you think they go together?
This year has been very eventful thus far, but if you care about politics, the main event is yet to happen.
Of course, I’m talking about the upcoming U.S. presidential election. On November 3, 2020, American voters will decide whether President Donald Trump will remain in the White House for another four years.
As you’d expect in these uncertain times, there has been a lot of speculation on which stocks to buy if Trump gets re-elected and which stocks to buy if Joe Biden wins.
For instance, it seems natural to think that energy stocks, bank stocks, and defense stocks would do well under a Republican administration. Meanwhile, renewable energy stocks and weed stocks should outperform under a Democratic administration.
However, buying stocks based on predicted election results is like betting. You can check the odds from bookies and look at the different polls, but we all know how accurate those things were during the last election. Besides, even if you guess the outcome correctly, the stock market’s reaction to the result can still be highly unpredictable.
Just a reminder: when Donald Trump emerged victorious on election night in 2016, futures for the Dow Jones Industrial Average plunged nearly 900 points; but before you knew it, calm had returned to the market and stocks started soaring to new heights.
The point is, if you are an investor with a long-term horizon—as opposed to a short-term trader, that is—there is not much need to speculate on stocks based on projected election results.
Obviously, there is still uncertainty ahead, which is why dividend stocks are particularly worth considering right now. No matter where a company’s share price is going, if it sticks to a regular dividend policy, its shareholders will get paid.
The best part is, there are companies well-positioned to pay dividends regardless of who sits in the Oval Office. And some of them can pay quite a lot.
3 Dividend Stocks to Consider Before the U.S. Presidential Election
Company Name Stock Symbol Dividend Yield American Electric Power Company Inc NYSE:AEP 3.50% Iron Mountain Inc NYSE:IRM 8.20% Hess Midstream Operations LP NYSE:HESM 9.80% American Electric Power Company Inc
As the name suggests, American Electric Power Company Inc (NYSE: AEP) is an American electric utility. Founded in 1906, the company now operates and maintains the largest electricity transmission system in the country, delivering power to nearly 5.5 million regulated customers in 11 states. (Source: “Climate Action 100+,” American Electric Power Company Inc, last accessed September 3, 2020.)
At the same time, AEP is one of the largest electricity producers in the U.S., with approximately 30,000 megawatts of diverse generating capacity.
Now, you can probably see why AEP can be a great long-term dividend stock just from its business description. No matter what the economy is doing—and regardless of who the president is—people need to turn their lights on at night. And even if we are in a deep recession, electricity bills will probably be the last ones people skip.
It also helps that the industry is highly regulated and has limited competition—you rarely see two electric utilities serving the same region.
Combining a recession-proof business model with what is essentially a monopoly market position, AEP has the ability to pay dividends through thick and thin. As a matter of fact, the company has been paying consecutive quarterly dividends for 109 years.
The payout has been rising, too. Over the past decade, AEP stock’s quarterly dividend rate went from $0.46 per share to $0.70 per share, marking a total increase of 52.2%. (Source: “Stock & Dividends,” American Electric Power Company Inc, last accessed September 3, 2020.)
Trading at $80.31 per share, AEP stock offers investors an annual dividend yield of 3.5%.
While that’s not really a high yield, keep in mind that most companies are paying much less. At the time of this writing, the average dividend yield of S&P 500 companies was just 1.67%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed September 3, 2020.)
As you’d expect, the electric utility’s business has been quite resilient. In the second quarter of 2020—a period where a lot of companies struggled due to COVID-19-related shutdowns—AEP generated operating earnings of $1.08 per share, which actually represented an eight percent increase year-over-year. (Source: “AEP Reports Strong Second-Quarter 2020 Earnings; Managing Performance During Economic Downturn,” American Electric Power Company Inc, August 6, 2020.)
Moreover, the amount easily covered the company’s quarterly dividend payment of $0.70 per share.
Management also reaffirmed AEP’s full-year operating earnings guidance range of $4.25 to $4.45 per share. Based on the company’s annualized dividend of $2.80 per share, I’d say the payout is more than safe.
Iron Mountain Inc
Moving up the yield ladder, we have Iron Mountain Inc (NYSE: IRM), a storage and information management company headquartered in Boston, MA.
Founded in 1951, Iron Mountain has grown to become one of the leading players in its industry. Today, it has a real estate network of over 1,400 facilities totaling approximately 93 million square feet. These facilities are located in around 50 countries across six continents. (Source: “Investor Presentation Q3 2020,” Iron Mountain Inc, last accessed September 3, 2020.)
Other than diversifying geographically, Iron Mountain also has a diversified customer base. Right now, the company has more than 225,000 customers coming from over 50 different industries. Notably, around 95% of Fortune 1,000 companies are Iron Mountain customers.
The storage and information management business may not sound exciting, but it is quite a critical one, as many companies have valuables that they want to safely stash away. To give you an idea, the top three industries that Iron Mountain serves are healthcare, financial, and legal.
The business is also a very durable one. Think about it, if a company chooses to store its valuables at an Iron Mountain facility, chances are it will keep the stuff there instead of moving it around all the time. Due to high switching costs, the storage business is known for having high customer retention. In Iron Mountain’s records management business, the company boasts a 98% customer retention rate. Moreover, more than 50% of boxes stay in IRM’s facilities for 15 years on average.
And, of course, it doesn’t matter whether we have a Democrat or a Republican in the White House, most customers will be keep paying Iron Mountain Inc.
The durable business model means that Iron Mountain can pay sizable dividends. The company currently follows a quarterly dividend rate of $0.6185 per share, which comes out to a very generous annual yield of 8.2%. That makes IRM stock one of the highest-yielding names among S&P 500 components.
Hess Midstream Operations LP
For those who are really looking for yield, Hess Midstream Operations LP (NYSE: HESM) is a name worth checking out.
Headquartered in Houston, Texas, Hess Midstream is in the midstream energy business. The partnership owns oil, gas, and produced water handling assets primarily located in the Bakken and Three Forks Shale plays in the Williston Basin area of North Dakota. It operates through three main segments: gathering; processing and storage; and terminalling and export. The partnership provides midstream services to its sponsor Hess Corp. (NYSE: HES), as well as to third-party customers.
Now, the outcome of the U.S. presidential election will have an impact on the future of the energy industry. But Hess Midstream Operations still deserves income investors’ attention for a very simple reason: it managed to provide huge cash returns to its unitholders in what was arguably the most difficult operating environments for a lot of energy companies.
You see, the outbreak of COVID-19—and the subsequent plunge in oil prices—has created an extremely challenging operating environment for upstream, midstream, and downstream operators. Unsurprisingly, dividend cuts were not uncommon, especially among the high-yielding names.
Hess Midstream has been very generous when it comes to unitholder distributions. It was yielding way over 10% when its unit price tumbled during the market sell-off earlier this year. So, given that it was a high-yield stock from the energy business, you might have expected it to slash its payout alongside its peers.
But that’s not really the case. As a matter of fact, the partnership did the exact opposite.
On July 27, Hess Midstream announced a 1.2% increase to its quarterly cash distribution, to $0.4363 per unit. The distribution was paid on August 14. (Source: “Hess Midstream LP Announces Increased Quarterly Distribution,” Hess Midstream Operations LP, July 27, 2020.)
Trading at $17.83, HESM stock’s latest distribution translates to an annual yield of 9.8%.
And if you look a bit further back, you’d see that Hess Midstream has paid a higher cash distribution to investors every single quarter since its initial public offering in April 2017. (Source: “HESM Dividend History,” Nasdaq, last accessed September 3, 2020.)
The best part is, even after all the distribution hikes, the partnership was still able to cover its payout.
In the second quarter of 2020—a period where a lot of energy companies reported substantial declines in financials—Hess Midstream generated $124.1 million in distributable cash flow, which provided 1.2 times coverage for its cash distribution. (Source: “Hess Midstream LP Reports Estimated Results for the Second Quarter of 2020,” Hess Midstream Operations LP, July 29, 2020.)
One of the reasons behind Hess Midstream’s resilient performance is its fee-based business model. For instance, its contracts with Hess Corp. are 100% fee-based.
Looking ahead, approximately 95% of Hess Midstream’s revenue will be protected by minimum volume commitments. Despite the challenging economic environment, management is targeting a five-percent distribution per unit growth through 2022. (Source: “Investor Relations Presentation,” Hess Midstream Operations LP, last accessed September 3, 2020.)
In other words, if an investor buys HESM stock today—and earns a very handsome yield of 9.8%—they might be rewarded with even higher yield on cost in the years ahead.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|AMERICAN ELECTRIC POWER||92.02||23.0||4.00||2.68||2.94|
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