Based on the prices and dividends at the time of this writing, the average dividend yield of shares in Vitesse Energy(NYSE: VTS), the JPMorgan Equity Premium Income ETF(NYSEMKT: JEPI), and Whirlpool(NYSE: WHR) is 7.8%. All three are attractive, but all contain risk. Before adding these three stocks to a high-yield portfolio, here's what you need to know.
Vitesse Energy (dividend yield of 9.1%)
Vitesse is an oil and gas exploration and production company with a difference. Instead of owning and operating assets, it focuses on investing in minority working interests in assets produced by other leading companies. In addition, management follows a discretionary strategy of hedging some of its oil production to protect the downside risk of a fall in the price of oil.
It's an attractive model because it focuses the value creation activity of the company based on what management does best -- acquiring productive interests in oil wells and then generating cash flows from oil and gas production.
That said, it makes sense to look at the risks. First, as noted, the hedging strategy is discretionary, so you are always somewhat reliant on management's ability to hedge appropriately. Second, a significant slump in the price of oil will still hurt Vitesse Energy as it will make producing oil less cost-effective for oil producers. Third, management may not be able to identify value-enhancing acquisitions.
All told, Vitesse is attractive to investors who are bullish on oil and those who are happy with the price around the current mark. In addition, if you are confident in the management team led by industry veteran Bob Gerrity, then Vitesse is an excellent stock to add to a diversified income-generating portfolio.
The JPMorgan Equity Premium Income ETF (dividend yield of 6.8%)
The first key point to understand about this ETF is that it invests at least 80% of its assets in actively managed U.S. equities -- meaning it gives investors exposure to the U.S. stock market and the dividend yields generated by the stocks it holds.
Image source: Getty Images.
Second, it invests up to 20% of its assets in buying equity-linked notes (ELNs) that sell out-of-the-money call options on the S&P 500, which is a hedge against volatility and significant stock declines. It is worth noting that it allows the ETF to pick up a premium when the S&P 500's performance is negative in the month or rises moderately, but the ETF will lose money on the ELNs in a sharply positive month for the S&P 500.
In a nutshell, you can expect the ETF to be positive but underperform the market in sharply rising markets (but still deliver good income), as the rise in equity value will be offset by losses on the ELN strategy. Still, the ETF's downside is protected when equity markets decline due to the ELN strategy.
The fund's sweet spot is an environment of moderately rising equity markets, allowing for dividend income, premiums from the ELN strategy, and capital appreciation from equities.
This is borne out by looking at its track record.
JEPI Total Return Level data by YCharts
Overall, it's a good option for investors looking for monthly income and those worried about the stock market's downside risk.
Whirlpool (dividend yield of 7.5%)
This company faces significant near-term risks but has plenty of long-term opportunities. The persistence of relatively high interest rates and a concomitant slowdown in existing home sales negatively impact consumer discretionary purchases of major domestic appliances (MDAs).
That's holding back MDA sales in North America and pressuring profit margins, as discretionary purchases can be higher margin (think planned kitchens) compared to lower-margin replacement demand for items like refrigerators and washing machines. As such, management lowered its full-year margin, earnings, and cash-flow guidance on its last earnings call.
If Whirpool's end market conditions deteriorate further, its dividend might be affected, or at the least, its plans to reduce its $6.3 billion long-term debt will be pushed back.
On the other hand, management believes its price increases in the spring helped North American MDA segment profit margins to improve to 6.3% in the second quarter compared to 5.6% in the first quarter. Moreover, management expects North America MDA to end the year with 9% margins.
In addition, the other three segments (responsible for 38% of segment profit in the second quarter) all grew year-over-year earnings in the second quarter.
Image source: Getty Images.
The stock's upside comes from a potentially better interest environment ahead and a recovery in the housing market, although that may not start until 2025 at the earliest. Until then, Whirlpool will need to muddle through. It could get worse before it gets better, but the stock looks like a good value at a trailing price-to-earnings ratio of less than 10.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.
