Investing in high-yielding dividend stocks can be risky. Sometimes high yields are associated with plunging stocks and unsustainable dividends. That's why it usually makes sense not to invest in companies whose dividends are above 5%. However, that doesn't mean all companies that pay high dividends are bad investments.
Westlake Chemical Partners(NYSE: WLKP), NewLake Capital Partners(OTC: NLCP), and Lazard(NYSE: LAZ) are often overlooked, despite their generous dividends that yield 5% or more. Westlake Chemical Partners' ownership structure is complicated, and that confusion may turn off some investors. NewLake has only been in business since 2019, so it is unknown to many. Lazard is an investment bank that specializes in advising on mergers and acquisitions (M&A), so corporate officers are more familiar with the company than typical retail investors are. All three stocks trade at relatively low multiples, which makes them enticing.
Westlake Chemical Partners has a pipeline to profit
Westlake Chemical Partners is often confused with Westlake Chemical, but the former is a master limited partnership (MLP) formed by Westlake Chemical to acquire and produce ethylene. It owns a 22.8% interest in Westlake Chemical OpCo, which has an ethylene pipeline, as well as plants in Kentucky and Louisiana that turn ethane into ethylene. Ethylene is used to make polyethylene, the most commonly produced plastic, used mostly for packaging; and polyvinyl chloride (PVC), a plastic with many uses, including piping, siding, blood bags, tubing, wire insulation, and cable insulation.
Mainly, investors need to know that Westlake Chemical Partners has a high-yielding dividend that is well protected because of its predictable cash flows.
The stock is down more than 11% over the past year, but up more than 10% over the past three months, and trades for just 11 times earnings. The company has kept its quarterly dividend at $0.47 for the past three years, giving it a current yield of around 7.8%. The company's cash dividend payout ratio of 24.2% leaves plenty of room for increased dividends.
Through nine months (ended Sep. 30), Westlake reported $1 billion in revenue, up 43.9% year over year, while net income came in at $243.6 million, down 7% over the same period last year. The lower net income was due to lower margins on third-party ethylene sales and higher interest expenses. However, both difficulties are due to macroeconomic conditions. Ethylene prices tend to cycle lower in the winter and rise in the spring while inflation may also be on the wane. The company's MLP distributable cash flows through nine months were $55.6 million, up 1.5% year over year.
NewLake Capital Partners is growing smartly
NewLake Capital Partners is a cannabis real estate investment trust (REIT) specializing in triple-net leasebacks of properties to cannabis retailers. While cannabis companies have struggled over the past year, NewLake -- because it has been selective with its clients -- is thriving and continues to collect 100% of contracted rents. It leases its 32 cultivation properties and dispensaries. The company's shares are down more than 23% over the past year, though up more than 15% the past month. It trades at 21 times earnings.
Through the first nine months of 2022, the company reported revenue of $32.6 million, up 70.9% year over year. Funds from operations (FFO) -- a more accurate metric than net income for REITs because of their unique structure -- was $24.7 million through nine months, up 94.5% year over year, while adjusted FFO (AFFO) was $27.8 million, up 90.9% over the same period last year.
For tax purposes, REITs are required to distribute 90% of their taxable income through dividends, making NewLake's dividend yield pretty juicy at around 8.19%. The company has raised its dividend for seven consecutive quarters, including a 5.4% bump in the fourth quarter to $0.39 per quarterly share. Even with the increases, thanks to the company's AFFO growth, the dividend is well covered, with an AFFO payout ratio of 79.5%. The industry's overall downturn remains a concern, even though NewLake has been selective with its tenants, focusing on properties that are in more profitable limited license states.
Lazard's dividends make it easy to deal with
Lazard operates in 43 cities across 26 countries. The company's shares are down more than 7% over the past year but are up more than 10% in the past three months. The financial advisory and management firm raised its quarterly dividend last year by 6% to $0.50, equaling a yield of around 5.18%. It is well covered with a cash dividend payout ratio of 20.1%.
The company had a down year financially in 2022. Full-year 2022 revenue was reported as $2.8 billion, down 12% over 2021. Annual net income was $384 million, or $3.73 per share, down 32% and 24%, respectively, compared to 2021.
The reason for the drop is that M&A activity was down globally, in general, thanks to the factors that made the stock market struggle: inflation, supply chain issues, and higher interest rates. A report by the Harvard Law School Forum on Corporate Governance said that there was an M&A deal volume of $3.6 trillion in 2022, down from $5.7 trillion in 2021. Fortunately for Lazard, business seems to be picking up lately.
Lazard said that during and since the fourth quarter of 2022, it has been part of several big deals, led by the $7.5 billion sale of Terminix to Rentokil Initial and the $7.1 billion sale of Tenneco to Apollo Funds. That trend may continue. A survey by PwC Global said that though 73% of corporate leaders are pessimistic about growth this year, 60% said they aren't planning to delay deals because of the current economic climate.
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Jim Halley has positions in Lazard and Westlake Chemical Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
