Long-term income investors prefer to sleep well at night. They like stocks with high dividend yields and low volatility. In our Global Hidden Gems Portfolio, apart from handpicking stocks that are profitable but trading less than net cash, we also featured high dividend yield stocks around the world in a monthly basis. Here is a list of 70 stocks with the highest yields, but with volatility in the S&P 500 basket.
Source: Global Hidden Gems Portfolio
All of these S&P 500 stocks meet the criteria:
- The dividend yield is larger than 3%.
- Lower volatility than the general market, that means their betas are all less than 1.
The world's biggest fiber company
CenturyLink (CTL, Financial) has reached its 27-year-low, resulted from the market mistrust when the company’s auditor stated that it had material weaknesses in its internal control. However, the market has overreacted negatively because even with proper procedures, internal control error cannot be eliminated completely. One confidence factor is that both CEO and CFO has recently turned bullish in CenturyLink, buying in 50,000 and 15,000 shares of the company, respectively. Many investors might worry about its high leverage balance sheet. However, the management is trying the best to reduce its leverage level to a more reasonable level. From the first quarter of 2018, its net debt to adjusted Ebitda has gone down from 4.3x to 3.9x. In the next three years, CenturyLink estimated to reach reasonable target leverage of 2.75x to 3.25x. By 2020, CenturyLink is expected to generate $1.30 in per share earnings. With a 14x P/E valuation, CenturyLink should be worth $18.2, an 80% upside. In addition, investors can receive an additional 10% dividend yield each year. Thus, the total return should be around 100% in two years.
Physical Storage Company with 8% dividend yield
Iron Mountain (IRM, Financial) is another stock in the S&P 500’s highest dividend yield list. Its current dividend yield is around 8%, with the beta of only 0.63. Iron Mountain has a very good high-margin business model. More than 50% of the total revenue was from physical storage business. It is serving more than 230,000 customers in 53 countries. The company enjoys very high retention rate, at around 98%. Its clients contracted to store physical data and records with the company for a very long time. Around 51% of boxes is around 15 years old, and around 35% of boxes have been in storage for around 22 years.
Source: IRM Presentation
In the first quarter of 2019, Iron Mountain has released disappointing results. Both funds from operations (FFO) and adjusted funds from operations (AFFO) came in lower than estimated. The market reacted right away, with its share price down by more than 9%. The management blamed the bad quarter results on higher labor costs in its North America businesses. For the full year 2019, Iron Mountain is still expected to grow revenue by 1%-6% and AFFO by 1%-8%.
At the current price, its forward P/FFO is only 14x, much lower than its peers including Terreno Realty (TRNO) at 32.8x and CoreSite Realty (COR) at 22.16x.
High-occupancy mall REIT
The third highest dividend income stock in the S&P 500’s basket is Macerich Co. (MAC, Financial). Macerich, the only general partner and the majority owner of The Macerich Partnership, which has an ownership interest in 47 regional shopping centers and five community shopping centers, covering 51 million square feet of leasable area. Macerich has been growing consistently in the past ten years. Its average base rent per square foot has increased from $40.67 in 2009 to $60.74 in first-quarter 2019, a 4.4% compounded annual growth. Economic sales per square meters experienced a 6.7% compounded annual growth, from $467 to $869 in the same period.
Source: Macerich presentation
In the mall REIT business, the most important figure is the occupancy rate. Despite the global downturn in 2009, Macerich still enjoyed high occupancy rate at 91.3%. In the period of 2009-2018, the occupancy rate has ranged from 91.3% to 96.1%. In 2018, Macerich reached 95.4% occupancy. If the macroeconomy weakens in the near future, of course, it will affect all mall operators. History has indicated that Macerich has a high chance to deliver strong results even in the macroeconomic downturn.
At the current price, Macerich is paying 7.4% dividend yield, with only 10.57x forward P/FFO, lower than Simon Property’s (SPG) valuation of 13.3x. In 2019, Macerich expects to generate $3.56 in FFO. If Macerich has a similar P/FFO with Simon Property, it would be valued at $47.3 per share, a 27% return from the current price in one year. In addition, investors get an additional 7.4% dividend yield within one year. Thus, the total annual return is 34.4%.
Key takeaways
Income investors should look closely into the stocks of the list above to determine the high dividend yield but low beta stocks for their own portfolios. The top three stocks in the list, CenturyLink, Iron Mountain and Macerich are quite suitable for their income portfolio to hold in the long run.
