While a double-digit dividend yield may appear enticing to income investors, it is crucial to exercise caution when approaching these ultra-high-yielding names.
In a recent Lightning Round segment of CNBC’s “Mad Money” program, a viewer asked host Jim Cramer about Annaly Capital Management Inc. (NYSE:NLY) — a mortgage real estate investment trust (mREIT) with an eye-popping yield.
The company pays quarterly dividends of 65 cents per share, giving the stock an annual yield of 14%.
But Cramer is not a fan.
“That’s a stock that I think is a trap,” he said. “It always looks like it has a high yield, but the fact is it’s been a terrible performer for years and years. I want to stay away from it.”
While Cramer has warned investors about the potential pitfalls of this high-yield stock, there are other dividend plays in the market. Here’s a look at three that Wall Street finds particularly attractive.
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Realty Income Corp. (NYSE:O)
Realty Income is a REIT that brands itself as “The Monthly Dividend Company,” and it deserves that title. Through its 54-year operating history, the company has declared 636 consecutive monthly dividends.
Better yet, Realty Income has increased its payout 121 times since going public in 1994.
Today, the REIT pays monthly dividends of 25.5 cents per share, translating to an annual yield of 5.1%.
The amount is not as high as the 14% yield offered by Annaly Capital, but keep in mind that the average dividend yield of S&P 500 companies is just 1.6% at the moment.
Stifel’s Simon Yarmak has a Buy rating on Realty Income and a price target of $71.25, implying a potential upside of 19%.
While publicly traded REITs have been popular, new companies have innovated ways for people to earn passive income in the real estate market. Here’s how to invest in rental properties with as little as $100 while staying completely hands-off.
FirstEnergy Corp. (NYSE:FE)
FirstEnergy is an electric utility headquartered in Akron, Ohio. It has 10 electric distribution companies serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York.
Utility companies have long been a staple for dividend investors because of their reliability. Come what may, people will always need to turn their lights on at night.
FirstEnergy has a quarterly dividend rate of 39 cents per share, which comes out to an annual yield of 4% at the current share price.
In the first quarter, the company earned a net income of $292 million, or 51 cents per share. In its earnings release, FirstEnergy affirmed its long-term target of annual operating earnings per share growth rate of 6% to 8%.
Shares are down 7% year to date, but Morgan Stanley analyst Stephen Byrd sees a rebound on the horizon. Byrd has an Overweight rating on FirstEnergy and a price target of $45 — around 15% above where the stock currently sits.
Energy Transfer LP (NYSE:ET)
Energy Transfer owns one of the largest portfolios of energy assets in the U.S.
With approximately 120,000 miles of pipelines and associated energy infrastructure, the partnership has a strategic network that spans 41 states and all of the major production basins in the country.
In April, Energy Transfer announced a quarterly cash distribution of 30.75 cents per unit. At the current unit price, the amount translates to an annual yield of 9.7%.
In the first quarter, Energy Transfer’s distributable cash flow (DCF) attributable to partners totaled $2.01 billion, which was more than the amount needed to pay cash distributions to partners for the quarter.
“On an incurred basis, we had excess DCF of $640 million after distributions of $967 million and growth capital of $407 million,” Energy Transfer Co-CEO Tom Long said during the earnings conference call.
J.P. Morgan analyst Jeremy Tonet has an Overweight rating on Energy Transfer and a price target of $18. Considering that the stock currently trades at $12.75, the price target implies a potential upside of 41%.
There are many high-yield plays in the midstream energy space. If you prefer a diversified approach rather than picking individual stocks, you might want to check out exchange-traded funds that focus on the sector. The USCF Midstream Energy Income Fund (NYSE:UMI), for instance, seeks “a high level of current income” and capital appreciation and provides exposure to a range of midstream energy assets. Energy Transfer is currently its second-largest holding.
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This article Jim Cramer Says This 14% Yielding Stock Is A Trap — Here Are 3 Dividend Plays That Could Be More Reliable originally appeared on Benzinga.com
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