Image Source: Pixabay

The S&P 500 has offered attractive total returns over the long term but it has almost always offered a lackluster dividend yield. It is thus natural that many income-oriented investors prefer to invest in high-dividend stocks. This is especially true in the highly inflationary environment prevailing right now, which erodes the real value of investment portfolios. In this article, we will discuss the prospects of three high-yield stocks that offer exceptionally high yields with a wide margin of safety, namely Altria (MO), Magellan Midstream Partners (MMP), and MPLX LP (MPLX).

Altria

Altria is a consumer staples giant, with a history of 175 years. The company is the producer of the top-selling cigarette brand in the world, namely Marlboro, as well as some non-smokeable products. Marlboro has maintained a market share of about 40% for several years in a row. Altria also has large stakes in global beer giant Anheuser Busch InBev (BUD), Juul, a vaping products manufacturer, and Cronos Group (CRON), a cannabis company.

Altria is negatively affected by a secular trend, namely the slowly declining consumption of cigarettes per capita. The consumption of cigarettes per capita has steadily decreased over the last 30 years. On the other hand, the demand for cigarettes is price-inelastic and hence Altria enjoys strong pricing power. It has thus been able to implement material price hikes year after year and thus it has offset the effect of declining consumption per capita.

To be sure, Altria has an exceptional performance record. During the last decade, the company has grown its earnings per share every single year, at an 8.8% average annual rate. This growth rate combined with the consistency of the tobacco giant is a testament to the strength of its business model.

In the last few years, Altria has been caught somewhat off-guard in the transition of consumers from traditional cigarettes to new products, such as vaping products. In late 2018, Altria acquired a 35% stake in Juul, a leader in vaping products, for $12.8 billion but the timing of the acquisition of the stake proved highly unfortunate. Since the acquisition, Juul has incurred several hits due to restrictions from regulators. As a result, Altria has written-off nearly its entire stake in Juul.

Nevertheless, Altria has remained on its long-term growth trajectory and expects to grow its earnings per share by 3%-6% this year, to a new all-time high. Moreover, Altria has grown its dividend for 52 consecutive years and is currently offering a nearly 10-year high dividend yield of 7.9%. Thanks to its reasonable payout ratio of 75%, which is a 10-year low for the stock, and its resilient business model, Altria is likely to continue raising its dividend for many more years.

Magellan Midstream Partners

Magellan Midstream Partners has the longest pipeline system of refined products in the U.S. The MLP has a pipeline network that is linked to nearly half of the total U.S. refining capacity. The transportation and storage of refined products generates about 65% of total operating income of Magellan while the transportation and storage of crude oil generates the remaining 35% of operating income.

Magellan is one of the highest-quality MLPs in the investing universe thanks to its superior characteristics. Most MLPs are highly leveraged, they post poor free cash flows due to their excessive capital expenses and dilute their unitholders significantly over the long run. They also tend to have payout ratios near or above 100%.

Magellan is superior in all these aspects. It has a strong balance sheet and has posted positive free cash flows for more than 10 consecutive years. In addition, the MLP has a healthy payout ratio and does not dilute its unitholders. In fact, since the onset of the pandemic, the stock has been trading at exceptionally low price-to-cash flow ratios and thus the company has been repurchasing units to enhance shareholder value. All these attributes are testaments to the quality and the discipline of its management, which is laser-focused on investing exclusively in high-return projects.

Magellan has exhibited an exceptional distribution growth record. It grew its distribution for 70 consecutive quarters at a 12% average annual rate, until the second quarter of 2020, in which it froze its distribution due to the coronavirus crisis. The MLP froze its distribution for seven consecutive quarters and resumed raising its distribution in late 2021 thanks to the recovery of its business from the pandemic. Overall, Magellan has raised its distribution for 22 consecutive years, at a 10% average annual rate.

The stock is currently offering a 7.9% distribution yield with a payout ratio of 71%. While this payout ratio may seem elevated to some investors, it is reasonable for a company with such a reliable business model. Given also its solid balance sheet, Magellan is likely to continue raising its distribution for many more years. The only caveat is the slow growth of Magellan, which should result in modest distribution raises in the upcoming years.

MPLX LP

MPLX is an MLP that was formed by Marathon Petroleum (MPC) in 2012. MPLX operates in two segments: Logistics and Storage, which involves the transportation and storage of crude oil and refined products, and Gathering & Processing, which is related to natural gas and natural gas liquids. The company generates about 65% of its EBITDA from its Logistics and Storage segment.

MPLX has a fee-based model, which is based on charging fees for the volumes of products transported and stored throughout the network of the company. MPLX has minimum-volume contracts with its customers and thus it enjoys resilient cash flows even during downturns, in which its customers transport and store lower volumes than usual.

MPLX also greatly benefits from the multi-year contracts it has signed with its parent company, Marathon Petroleum. Thanks to these contracts, MPLX has a strong position in the Marcellus / Utica region, one of the most prolific regions in the U.S., and enjoys strong cash flows even during adverse economic periods.

MPLX has raised its distribution every single year since its formation, in 2012. In addition, the stock is currently offering an exceptionally high distribution yield of 9.0%. Thanks to its solid payout ratio of 61% and its healthy leverage ratio (Net Debt to EBITDA) of 3.5, MPLX is likely to continue raising its distribution for many more years.

Final Thoughts

The above three stocks are offering exceptionally high dividend yields, which are in excess of 7.5%. When a stock offers such a high yield, it usually signals that the dividend is at the risk of being cut upon the next downturn. However, this is not the case for the above three stocks. Altria, Magellan, and MPLX have resilient business models and thus they offer attractive dividends with a wide margin of safety.

More By This Author:

3 Top Monthly Dividend Stocks For 2023
3 Top Dividend Kings For 2023
Dividend Aristocrats In Focus: Nordson Corporation