By: Dividend Sensei
In today’s era of low-interest rates, investors looking for income from their portfolios are turning to stocks and their dividends as a way to generate cash without being forced to sell their shares. As tempting as that might be, high-yield investing brings with it its own series of problems.
Among these is the reality behind the simple saying that if something seems too good to be true, it probably is. High yields are often the signs of dividend traps — companies whose dividends are likely to be cut.
Finding stocks with decent yields that have a reasonable chance of continuing to pay or even increase their dividends requires you to look deeper than simply at the company’s yield. You have to understand what provides a reason to believe that dividend can continue. Even then, there are no guarantees, but these three stocks have dividends yielding more than 5% and still look like they’re worth considering.
1. The pipeline giant with a cleaned-up balance sheet
Energy pipeline giant Kinder Morgan (NYSE:KMI) got into hot water with the bond rating agencies in late 2015 when it overleveraged itself to rescue the Natural Gas Pipeline Company of America. A threatened downgrade into junk bond status forced Kinder Morgan to slash its dividend and take substantial actions to clean up its balance sheet.
That stronger balance sheet, on top of still-solid operations and cash flows, allowed it to resume increasing its dividend. In fact, even during the worst of the COVID-19 pandemic so far, around the time oil was flirting with prices below $0, Kinder Morgan was able to increase its dividend by 5%. For a company that relies on moving energy around, being able to boost its payment even as its world appeared to be falling apart is a sign of just how much stronger it is today than it was in 2015.
At recent prices, Kinder Morgan offers investors a yield of around 6.9%. Even with that dividend boost and after accounting for changes driven by COVID-19, it expects its dividend payment to be well covered by its operating cash flows throughout the year. This is largely because people and businesses are still using oil and natural gas.
Although energy use is down overall due to the pandemic, pipelines are generally a lower-cost way to move energy around, helping buffer it from the worst of the slowdowns. That gives reason to believe Kinder Morgan will have a great shot at sustaining (and eventually resume increasing) its dividend.