Three high-yield stocks to bet on

Growing concerns over global growth, the ongoing Brexit stalemate, and the spectre of the seemingly unending U.S.-China trade war have continued to hammer government bond yields and fuel market anxiety.  The U.S. 10-year Treasury yield is currently hovering around 2% forcing many investors to look beyond traditional safe haven assets. In fact, just under half (44%) of S&P 500 stocks are yielding more than 10-year government bonds, according to research firm FactSet.   

The U.S. Federal Reserve cut the benchmark interest rate by 25 basis points today, and many analysts have priced in more than one rate cut before the end of 2019.

With yields this low, and falling further, investors in risk-off mode may find more comfort in dividend-paying stocks as a better alternative to bonds. Dividend-paying stocks are a great way to participate in equity markets for both income and total return. While some sectors offer higher yields than others, prudent investors tend to pick winning stocks rather than sectors. These companies, from diverse sectors, offer stable and predictable dividend payout, have steady cash flow, and potential for some price appreciation.

 
U.S.-based integrated energy company, Dominion Energy (D) possesses approximately 31,000 megawatts of electric generation capacity and more than 100,000 miles of natural gas transmission, distribution and gathering pipelines. The firm operates one of the nation’s largest natural gas storage systems, recently completed a liquefied natural gas export facility in Maryland, and owns nearly half of the under construction Atlantic Coast Pipeline.

In a strategic pivot, Dominion has increased focus on the development of new wide-moat projects with conservative strategies. As part of this vision, the energy behemoth has exited some business, shed non-core assets, and has been making significant investments in moaty utility infrastructure, including the US$4 billion Cove Point Liquefied Natural Gas export facility and the US$8 billion Atlantic Coast Pipeline, says a Morningstar equity report.

“Wide-moat businesses generate about 45% of Dominion’s operating earnings versus roughly half before the acquisition of Scana and acceleration of regulated utility investments,” says Morningstar strategist, Travis Miller, who puts the stock’s fair value at US$84.

Dominion’s Cove Point LNG export facility, in particular, underpins the firm’s wide moat and is an asset whose returns on invested capital are projected by Miller to be in the low teens, well above the estimated cost of capital. Dividend seeking investors may find it particularly interesting to know that the firm’s annual dividend increases have averaged 9% for the past five years, and that they would likely to continue to increase, says Miller.

Compass Minerals (CMP) produces salt, used for deicing, and sulfate of potash, a specialty fertilizer. The company’s main assets include rock salt mines in Ontario, Louisiana, and the U.K., as well as salt brine operations in Utah. Compass sells its salt products to industrial and consumer end markets, and fertilizer products to growers of high-value crops that are sensitive to standard potash.

Compass Minerals holds an enviable portfolio of cost-advantaged assets such as its Goderich rock salt mine in Ontario. “[The mine] benefits from unique geology, and with access to a deep-water port, it can deliver deicing salt to customers at a lower cost than competitors,” says a Morningstar equity report, noting that transportation costs make up a significant portion of total delivered costs to the customer. “Additionally, the company owns one of only three naturally occurring brine sources that produces SOP, [which is] priced at a premium to standard potash,” says Morningstar equity analyst, Seth Goldstein, who pegs the stock’s fair value at US$81.

Cost advantages have led to solid returns on invested capital (averaged 20% over the past decade) easily surpassing the cost of capital (8%), says Goldstein, who forecasts “Compass will continue to produce returns on invested capital that outpace the costs of capital for the next 20 years.”

Pharmaceutical industry titan, GlaxoSmithKline (GSK) is one of the largest companies by sales. The firm dominates several therapeutic classes including respiratory and antiviral, as well as vaccines and consumer healthcare products. Glaxo generates additional scale in certain markets like HIV and consumer products through strategic partnerships.

As one of the largest pharmaceutical companies, the UK-based drugmaker uses its vast resources to stay ahead of the competition by creating the next generation of healthcare treatments. “The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat,” says a Morningstar equity report, adding that the firm’s bouquet of products “spans several therapeutic classes as well as vaccines and consumer goods [which] insulates the company from problems with any single product.”

So diverse is its product platform that the highest revenue generator, Advair, represents just under 10% of total Glaxo revenue.

As for the pipeline, the firm has pivoted away from its historical strategy of slight enhancements in favour of true innovation. “The company’s advancement of its next-generation respiratory drugs should help Glaxo maintain its entrenchment in both asthma and chronic obstructive pulmonary disease as generic Advair competition intensifies,” says Morningstar sector director, Damien Conover, who appraises the stock’s fair value to be US$45, pointing out the company’s growing focus on the immune system, with genetic data to help develop the next generation of drugs.