Looking for dividend yield? This article is for you!
With interest rates and bond yields at ridiculously low levels, investors everywhere are reaching for yield, which inevitably means taking on risk, as equities with higher than average yields by definition have not been bid up by the market, and must be beaten-up names.
Today I’ve got three stocks with an average yield of more than 10% to consider. Please do note that these investments are higher risk than those companies I usually cover, so trade with caution.
The company with the highest current dividend yield of the bunch, at around 15%, is Vermillion Energy, is a Canadian oil company that has been hit very hard recently — much more so than many of its peers. This reality is reflected in the company’s sky-high yield, and is a warning sign at these levels.
The market appears to be pricing in a dividend cut, which I think would be prudent, given the current dividend payout is underfunded, and Vermillion’s balance sheet needs some work.
If you’re betting on higher oil prices, Vermillion is a highly leveraged way to go. Otherwise, it’s a speculative play at best for the average investor.
A much better option than Vermillion might be Freehold Royalties, a play on royalties in the oil and gas space, and a company with a safer yield, albeit still a yield of 8%.
This company has seen its share price cut nearly in half over the past three years, despite a relatively decent balance sheet and good capital structure.
I also prefer the company’s royalty-based business model. Freehold needs approximately $55 WTI oil, which we’re basically at now, to fund all of its obligations including its dividend, so again, you need to be bullish on oil to play this name.
A smaller company, Arc Resources is a well-run company in the oil and gas space with a good management team capable of taking the company forward. Arc’s dividend yield currently hovers around 9% at the time of writing, but is probably the most sustainable dividend of the group, making this company my favourite of the trio.
Similar to the other two high dividend options, Arc has been hit hard by the bear market we’ve seen in commodity prices and is likely to see slower growth related to pessimism across the sector in the near term. Arc would be a 5-10 year hold, at minimum, to realize full value, in my opinion.
As discussed, these three companies do carry a very high and juicy yield, but that does come with a heck of a lot of risk. If you’re an investor seeking high-yielding equities, I’d recommend buying safer companies with yields in the 3-5% range that consistently raise their dividends to get the desired yield level over a longer stretch of time.
Stay Foolish, my friends.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool recommends FREEHOLD ROYALTIES LTD.
Fool contributor Chris MacDonald does not have ownership in any stocks mentioned in this article.