I Haven’t Been This Excited About Income Investing In Years

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You may think I am crazy to be excited about this stock market. Major market indexes are down for the year, many former high-flying stocks have crashed, and the market volatility is tremendous.

From the financial news, it appears that investors are very nervous about the value of their stock portfolios.

And yet, I don’t remember being this excited in a while…

My reason for a bit of giddiness is that I can’t remember another time when stock prices were so volatile while the underlying fundamentals of dividend-paying stocks were so strong.

For income-focused investors, this is not 2008 or the first quarter of 2020. Business results are robust, and share prices are weak. That combination provides an excellent opportunity for locking in income with the potential for share price appreciation.

As I keep getting asked about potential dividend cuts, I find myself thinking about how strong dividend-paying fundamentals are. In my Dividend Hunter service, the investments I recommend have stable dividends and are very well covered by free cash flow.

I keep repeating it, but I don’t remember another time when high-yield dividends were this stable and this well covered, with this much potential for dividend growth. I am excited about potential dividend increases and not concerned about dividend cuts.

Let’s look at a couple of ideas, starting with master limited partnerships (MLPs).

A few years ago, in the MLP world, distributable cash flow (DCF) coverage of 1.2 to 1.3 times distributions was considered more than adequate.

Today, we have large-cap MLPs with great DCF coverage and high yields. Here are a few examples:

  • MPLX LP (MPLX) for 2021 produced DCF of 1.64 times the distributions paid, leaving $361 million of excess cash flow. MPLX yields 8.6%.
  • Enterprise Product Partners LP (EPD) produced 2021 DCF that was 2.1 times distributions. EPD has increased common unit distributions for 23 straight years and currently yields 7.6%.
  • Crestwood Equity Partners LP (CEQP) has steadily grown free cash flow while keeping the dividend level. For 2022, the company forecasts distribution coverage greater than 1.3 times. CEQP currently yields 8.35%.

To avoid the Schedule K-1 tax reporting hassles that direct MLP ownership provides, I recommend investing in MLPs through a sector ETF.

The stock OneMain Holdings (OMF) provides another illustrative case. The share price is off 25% from its 52-week high. However, this is a company that grew EPS by 82% in 2021, and earlier this year it increased its dividend by 36%. The dividend rate gives a 38% payout ratio of earnings per share. Even with these great numbers, OMF is priced to yield over 8%. Back up the truck!

Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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