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All Contents © 2019The Kiplinger Washington Editors
By Charles Lewis Sizemore, CFA, Contributing Writer
| March 8, 2018
It’s not the easiest market out there for income investors. With bond yields being depressed for so many years (and still extremely low by any historical standard) investors have scoured the globe for yield, which has pushed the yields on many traditional income investments – namely, bonds and dividend stocks – to levels far too low to be taken seriously.
Even after rising over the past several months, the yield on the 10-year Treasury is still only 2.9%, and the 30-year Treasury yields all of 3.2%. (Don’t spend that all in one place!) The utility sector, which many investors have been using as a bond substitute, yields only 3.4%. Yields on real estate investment trusts (REITs) are almost competitive at 4.4%, but only when you consider the low-yield competition.
Bond yields have been rising since September, due in part to expectations of greater economic growth and the inflation that generally comes with it. This has put pressure on all income-focused stocks. This little yield spike might not be over just yet, either – especially if inflation creeps higher this year.
And this little yield spike might not be over just yet, particularly if inflation creeps higher this year. “Yields breached and stayed above 2.95% last week and recently passed the 3.19% barrier that was last reached just after the November 2016 election,” says Lance Gaitan, bond trader and editor of Treasury Profits Accelerator. “If inflation finally rears its ugly head, long-term Treasury yields have a good chance of moving up toward and even above 3.95%.”
Even if bond yields top out today and start to drift lower rather than higher, yields just aren’t high enough in most traditional income sectors to be worthwhile. So today, we’re going to cast the net a little wider. We’re going to take a look at five quirky dividend stocks that are a little out of the mainstream. Our goal is to secure high yields while also allowing for fast enough dividend growth to stay in front of inflation.
Data is as of March 7, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.
Courtesy Matt Dempsey via Flickr
Market value: $3.7 billion
Distribution yield: 5.1%*
Industry: Thrill parks
Let’s start with a stock whose ticker symbol should always elicit a chuckle: publicly traded amusement park operator Cedar Fair, LP (FUN, $66.36).
Seriously. You have to love a stock with “FUN” in its name.
Cedar Fair is a misfit a couple times over. To start, it is organized as a master limited partnership (MLP) rather than as a corporation. As a pass-through entity, Cedar Fair avoids corporate taxation. Even at today’s lower corporate rate of 21%, avoiding a layer of taxation is a big deal. All the same, most mutual funds avoid MLPs, and many investors are intimidated by the tax complexity.
Of course, Cedar Fair is an outcast even among MLPs. Most MLPs are invested in the energy sector, and specifically in midstream oil and gas pipelines. To the extent that you have institutional interest in MLPs, it tends to be in pipeline stocks. So, Cedar Fair is an orphan stock within an orphan sector.
That’s OK. At current prices, Cedar Fair yields 5.1%, and importantly, it has been steadily increasing its payout since 2012. Cedar Fair raised its distribution by a modest 4% at the end of last year, but the payout is up 123% since 2010. Not a bad run.
*Master limited partnerships pay distributions, which are similar to dividends, but are treated as tax-deferred returns of capital and require different paperwork come tax time.
Market value: $4.1 billion
Dividend yield: 7.3%
Industry: Entertainment and education real estate
While most real estate investment trusts specialize in broad asset classes such as apartments or office buildings, EPR Properties (EPR, $56.13) has a very specific niche, focusing mostly on entertainment. In fact, EPR is an abbreviation for “Entertainment Properties.”
EPR’s holdings include a wide range of non-traditional assets, including movie theaters, ski areas, golf driving ranges and charter schools. Its largest tenants include major theater chains like AMC Entertainment (AMC) and Cinemark (CNK), popular golf chain TopGolf and ski resort operator Peak Resorts (SKIS).
EPR does have an issue in that its properties tend to be highly specialized and hard to repurpose. What, exactly, would you do with a TopGolf driving range if that company were to unexpectedly far on hard times?
But at the same time, EPR’s management has proven its talent in finding accretive deals in this specialized space, and the stock is priced to more than adequately compensate for these risks. At current prices, EPR yields an attractive 7.3%, and the REIT has historically raised its dividend by a little more than 6% per year. That’s well in excess of the rate of inflation.
To put that in perspective, more mainstream triple-net REITs like Realty Income (O) and National Retail Properties (NNN) yield 5% and 4.8%, respectively. So EPR’s quirkiness really does translate into a higher yield – which is exactly what you want.
Market value: $9.3 billion
Dividend yield: 6.8%
Industry: Shredding and storage
Iron Mountain (IRM, $32.71) is one of several companies involved in cloud storage and data centers, but it’s far more than that. Its diverse collection of businesses also includes physical document storage, secure shredding of sensitive materials and document imaging.
Iron Mountain’s conversion to a REIT back in 2014 pushed the legal limits of what constituted “real estate.” Its countless racks stacked to the sky with document boxes certainly have little in common with apartment or office buildings. But the IRS signed off on it, and the company has been a dividend-raising monster ever since. Not including the two massive special dividends at the time of its conversion, IRM has raised its regular quarterly dividend by 118% over the past five years. And at current prices, the stock yields 6.8%.
Iron Mountain is an orphan stock. Because its operations look nothing like traditional real estate, it tends to get ignored by REIT investors.
That’s OK. Their neglect has created a fantastic opportunity for the rest of us. With document retention and accessibility more important than ever, Iron Mountain is well-positioned to pay a high and rising dividend for years to come.
Market value: $5.4 billion
Dividend yield: 4.3%
Along the same lines as Cedar Fair, competing amusement park chain Six Flags Entertainment (SIX, $64.48) is also worth a look.
Six Flags is the world’s largest regional theme park company – as opposed to international destination park operators such as Disney (DIS) – with $1.4 billion in revenue and 20 parks scattered across North America.
The company has enjoyed a solid string of profitability, and has grown its revenues every year since its 2009 bankruptcy.
Yes, “bankruptcy.” Six Flags entered the 2008 meltdown and Great Recession with high levels of debt, and like a lot of companies in those dark days, Six Flags found itself unable to refinance during a time when the banking system was failing and funds were hard to come by. The legacy of that bankruptcy has scared a lot of investors away from Six Flags, which partly explains the company’s decent 4.3% yield.
Let’s talk about that dividend. At first glance, it would seem unsustainable with a payout ratio of 122%. But Six Flags’ earnings are perpetually understated due to the high depreciation charges on its properties (many REITs and MLPs have the same accounting issues). Dividends made up a far more reasonable 70% of free cash flow over the trailing 12 months.
It’s also worth noting that Six Flags has raised its dividend in each of the past two quarters. Last quarter, the hike was 11%, and the quarter before that a solid 9%.
Unlike Cedar Fair, Six Flags is organized as a corporation rather than as a partnership. So it “looks” more like other the other stocks in your portfolio, and it avoids the more complex tax issues.
Market value: $2.7 billion
Dividend yield: 8.5%
Few companies are as quirky – or have quite the pariah status – as The GEO Group (GEO, $22.18). GEO is a private operator of prisons that is organized as a real estate investment trust (REIT).
Yes, it’s a prison REIT.
Prison overcrowding has been a problem for years. It seems that while getting tough on crime is popular with voters, paying the bill to build expensive new prisons is not.
This is about as far from a feel-good stock as you can get. It ranks alongside tobacco stocks on the scale of political incorrectness. The sheer ugliness of its business partially explains why it sports such a high dividend yield at well above 8%.
It’s also worth noting that this stock is riskier than everything else on this list. The U.S. is slowly moving in the direction of legalization of soft drugs like marijuana. While full legalization at the federal level isn’t yet on the horizon, you have to consider that a significant potential risk to GEO’s business model. Roughly half of all prisoners in federal prisons are there on drug-related convictions. At the state level, that number is about 16%.
GEO likely would survive drug legalization, as the privatization of public services is part of a bigger trend for cash-strapped governments. But it would definitely slow the REIT’s growth and it would seriously raise questions of dividend sustainability.
Furthermore, prison properties have very little resale value. You can turn an old warehouse into a trendy urban apartment building. But a prison? That’s a tougher sell.
So again, GEO is a riskier pick. But with a yield of more than 8%, you’re at least getting paid well to accept that risk.
Charles Sizemore was long EPR, O and NNN as of this writing.