Many high-yield dividend stocks don’t have enough firepower to cover their dividend payments. Or else they barely have the earnings to cover the dividend. This could be one reason why the stocks have a high yield.
Often these stocks either have to borrow money, sell assets, issue equity or debt just to be able to afford the dividends or “distributions.”
In fact, many REITs (real estate investment trusts) are in this situation. They sometimes camouflage their inability to finance their dividends out of net income earned by relying on sources other than net income.
I wanted to find seven stocks (no preferreds) that have very clean dividend cover. The company does not have to rely on some sort of financing arrangement in order to pay its dividends.
So I sought out seven large market cap stocks, whose net income earnings can more than cover their dividends out of net income earned by at least 2 times. This is on a forward estimated earnings and forecast dividend basis.
This filter eliminates many high-yield stocks, almost all partnerships, REITs and pipelines and other assorted stocks (including foreign stocks where we can’t easily project earnings).
In addition, the dividend yield has to be equal to or greater than 4.5%. Given the 2x cover requirement and the 4.5% yield filter, this implies the market is severely undervaluing these stocks.
Lastly, the market cap has to be greater than $1 billion. This eliminates any iffy situations with smaller-cap stocks that might have had one good year. These high-yield, well-covered stocks are:
- China Petroleum & Chemical Corp (NYSE:SNP)
- Braskem (NYSE:BAK)
- Ternium (NYSE:TX)
- OneMain Holdings (NYSE:OMF)
- New York Community Bancorp (NYSE:NYCB)
- Sinopec Shanghai Petrochemical (NYSE:SHI)
- Vector Group (NYSE:VGR)
Let’s dive in and take a closer look at these dividend stocks.
Dividend Stocks: China Petroleum & Chemical Corp (SNP)
Market Cap: $76.5 billion
Yield: 8.33%
Dividend Coverage: 2.2x
China Petroleum & Chemical Corporation is a large energy and chemical company, based in Beijing, China. It is involved in both upstream and downstream operations in the petroleum and related chemical industries as well as gasoline stations and depots throughout China.
Analysts forecast earnings-per-share (EPS) this year of $9.67 and next year of $9.33. This means that its semiannual dividends which totaled $4.48 per share so far this year are covered over 2 times by EPS.
Moreover, the stock is cheap. At Feb. 8’s price of $53.59, SNP stock had a forecast dividend yield of 8.33%. In addition, its forward price-to-earnings (P/E) multiple is low at just 5.5 times earnings (2021).
One reason this could be cheap is that investors fear that the U.S. government could end up kicking off all Chinese stocks from U.S. exchanges. There is no reason to believe this will happen in the short term.
Even if it does, anyone would be able to convert their SNP ADRs (American Depository Receipts) into the appropriate number of underlying ordinary shares. These trade on the Hong Kong Stock Exchange under the symbol “0318.HK.” So the fear about lack of liquidity in one’s investment is not borne out by real facts. Value investors will take advantage of this bargain opportunity.
Braskem (BAK)
Market Cap: $7.8 billion
Yield: 12.92%
Dividend Coverage: 2.8x
Braskem SA is a Brazilian chemical company that makes resins, chemicals, gasoline, plastics, gases, steam and petrochemicals. It has plants and sells in the U.S., Mexico, Brazil and Europe.
Analysts expect to see EPS this year of $7.29 and next year at $3.89. So its dividend this year of declared on Dec. 2, of $2.6307 (for the full year) is more than covered by earnings by 2 times for 2021. However, if earnings come in at just $3.89 for 2022, its earnings will not cover the same dividend by 2 times.
The dividend is declared once a year and there is no guarantee, as this is a foreign company, that it will maintain the same dividend. It is likely to be volatile as a percentage of profits.
As a result, even though this stock covers the dividend this year, it may not be able to maintain the same dividend in 2022. Value investors may want to watch the Q1 earnings and prospects for the company before taking a position.
Dividend Stocks: Ternium (TX)
Market Cap: $8.18 billion
Yield: 6.75%
Cover: 7.22x
Ternium is a Luxembourg-based steel and ore mining company with operations throughout South America, as well as the U.S. The company produces all forms of steel and mines iron ore and pellets.
So far this year the company has declared two dividends (a final dividend in April 2021 for $2.10 and a preliminary dividend in November 2021 for 80 cents). The total dividend of $2.o9 per share works out to a 6.75% dividend yield on its Feb. 8 price of $42.92 per share.
The full-year dividend appears to be covered by well more than 2 times, even though, like BAK stock above, its earnings could dip this year.
For example, analysts forecast EPS for 2021 of $20.93, but just $11.70 for the year ending December 2022. Nevertheless, the $2.90 dividend per share is covered more than 4 times even if the EPS falls to just $11.72 this year.
This high yield makes TX stock a very compelling value play for investors, especially since it appears to be so well covered by earnings by the company. Short of a global recession investors can assume that demand for steel and iron ore will continue to develop well over the next several years.
OneMain Holdings (OMF)
Market Cap: $6.83 billion
Yield: 6.97%
Cover: 2.3x
On Feb. 2, OneMain Financial released its full-year results showing that the consumer lending and insurance company made $2.02 per share in Q4 2021. That puts the company on a solid financial footing going forward, implying a run rate EPS of $8.08 for 2022. That makes the stock, at $54.02 as of Feb. 8, very cheap at just 6.7 times forward run-rate earnings.
Moreover, management raised the quarterly dividend by 36% to 95 cents per share. This puts the dividend per share at an annual rate of $3.80.
As a result, the dividend yield is now 6.97%. In addition, given that OneMain Financial made $9.87 in EPS in the last 12 months, the dividend has annual coverage of 2.6 times.
Analysts expect to see EPS this year of $8.66, according to Seeking Alpha. That puts the dividend on a coverage ratio of 2.3x. It also gives OMF ample room to buy back shares.
For example, in the last 12 months OMF repurchased $368 million in stock, including $192 million in Q4 alone. In fact, the board approved a new $1 billion share buyback program.
Therefore, at the $192 million quarterly rate, its full year buy back rate is $768 million. With 130 million shares outstanding this is worth $5.91 per share for every investor, or 10.8% of its market value.
Therefore, this shows OneMain is very shareholder friendly. The 7% yield and 10% buyback yield provide a 17% total yield for investors. That could propel OMF stock significantly higher in 2022.
Dividend Stocks: New York Community Bancorp (NYCB)
Market Cap: $5.32 billion
Yield: 5.95%
Cover: 2.0x
On Jan. 26, NewYork Community Bancorp reported solid Q4 and 2021 earnings and kept its dividend stable at 17 cents per quarter. The five-state community bank holding company reported EPS of $1.20, up 18% year-over-year on a GAAP basis. On a non-GAAP basis EPS was up 43% year-over-year.
Moreover, its full year dividend rate is 68 cents per share. This gives NYCB stock, which closed at $11.10 on Feb. 8, a dividend yield of 6.13%. Moreover, given that analysts forecast 2022 EPS of $1.39 and $1.56 in 2023, the dividend is 2 times covered for 2022 and more for 2023.
Moreover, as a new catalyst for the stock, the board announced that it had reinstated its share repurchase program. This will help push up the stock. It has a $17 million authorization remaining in its existing buyback program.
As a result of its profitability and its new buyback program, I would not be surprised to see NYCB raise the dividend sometime in the next year. It has kept the dividend at 68 cents annually ever since 2015. At some point, management might consider this, although there is no guarantee this could happen.
Sinopec Shanghai Petrochemical (SHI)
Market Cap: $5.45 billion
Yield: 6.69%
Cover: 3.0x
Sinopec is another petrochemical company based in Shanghai, China, just like SNP stock above. The company is forecast to make $4.62 in EPS in 2021 and estimates are for $5.22 next year.
Given that its annual dividend was $1.56 per ADR this year, the stock has a dividend yield of 6.69% at Feb. 8’s price of $23.27 per share. The dividend is more than 2 times covered both for 2021 and 2022, although the payment is just once a year.
That also means its 2021 price-to-earnings multiple is cheap at just 4.5 times forecast EPS of $5.22 this year. So, here we have a similar situation as SNP stock above. Everyone is afraid of these Chinese conglomerates, especially if the company delists from the NYSE.
But not to worry. It’s also listed on the Hong Kong Stock Exchange under symbol “338.HK.” So, worse comes to worse, investors would just have to have their brokerage firm convert their ADRs to ordinary shares and they could sell them on the HK stock exchange.
This makes the stock a unique value investment opportunity, given the arbitrage opportunities.
Dividend Stocks: Vector Group Ltd (VGR)
Market Cap: $1.72 billion
Yield: 4.58%
Cover: 2.0x
Vector Group is a two-pronged conglomerate. It has two divisions. The first makes and sells discount cigarettes. The second provides real estate services, such as brokerage, relocation, real estate sales and marketing and title insurance. It’s a sort of “barbell,” diversification strategy, especially since selling cigarettes is not considered especially millennial friendly, or let’s say, conventional.
Vector Group’s dividend yield is 4.58% at Feb. 8’s price of $11.29, based on its annual dividend 51.72 cents per share. This is more than covered earnings, even though they are forecast to fall to $1.04 EPS this year from $1.77 last year. That puts the dividend cover at 2x this year.
So, I suppose, if you can hold your nose for the way the company makes money pushing nicotine, then investing in VGR stock could be worthwhile as a value stock.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.