Aggressive investors are more than willing to accept higher levels of risk to get the potential for high returns. Many think of aggressive investors in terms of chasing growth, but some of these investors focus more on high yields.
If you’re an aggressive investors looking for high-yield stocks, you have plenty of options from which to choose. We asked three Motley Fool investors to pick stocks with high yields that could carry more risk. Here’s why they identified Energy Transfer Partners (NYSE:ETP), DineEquity (NYSE:DIN), and Seagate Technology (NASDAQ:STX).
A sky-high yield that just might pay off
Matt DiLallo (Energy Transfer Partners): Oil and gas pipeline giant Energy Transfer Partners currently yields a jaw-dropping 11.8%. That said, the reason it’s that high is that investors aren’t sure the company can maintain its current rate over the long term. Fueling those fears are its elevated leverage ratio, massive capex requirements, and the high management fees it pays to its parent.
While those are valid concerns, Energy Transfer believes it can navigate around them. That’s because the company is in the midst of an enormous expansion phase that should fuel significant earnings and cash flow growth over the next few years. In Energy Transfer’s estimation, those projects will provide a big-enough boost so that it can raise its payout by a double-digit rate in the near term, while fully supporting an increase in fees to its parent and reducing its leverage ratio.
There’s a huge risk, however, that Energy Transfer will fall short of this ambitious forecast, especially if it can’t raise the capital it needs to finance its growth projects at competitive rates, which might force it to reduce its payout and use that money to fund growth. However, if it can get that job done and maintain its distribution, investors who are willing to make an aggressive gamble and invest amid the uncertainty could reap a windfall of profits.
A high-yield restaurant stock
Tim Green (DineEquity): How does a profitable restaurant stock that yields an astounding 9% sound? DineEquity, which operates and franchises restaurants under the Applebee’s and IHOP brands, is exactly that. The stock has been hammered since peaking in early 2015, down about 60% from its high, creating a high-yield opportunity for investors.
But don’t jump into DineEquity without understanding the problems facing the company. Both the Applebee’s and IHOP brands are not exactly thriving, and Applebee’s in particular is struggling mightily. Through the first six months of this year, systemwide comparable sales at Applebee’s are down 7%. DineEquity attempted to rebrand Applebee’s in recent years to appeal to younger customers, but that effort has been abandoned due to lackluster results.
DineEquity is still plenty profitable. The company expects to produce free cash flow between $76 million and $86 million this year, a healthy double-digit percentage of revenue. The stock trades for around 10 times this free cash flow guidance, reflecting pessimism about the company’s ability to turn things around. Nearly all of this free cash flow will be eaten up by the dividend, which yields 9%.
DineEquity, then, is only for investors willing to bet that the Applebee’s and IHOP brands can be turned around and that the company can halt the ongoing earnings decline before it endangers the dividend. A dividend cut is possible down the line, but if you’re an aggressive investor looking for a high yield, DineEquity might be for you.
Hard-drive maker falling on hard times
Keith Speights (Seagate Technology): First, the bad news about my pick. Seagate Technology missed revenue and earnings expectations in its last quarter. The stock is down more than 10% so far in 2017. And the hard-drive maker just had a change at the top, with former president and COO David Mosley taking over as CEO. If you’re an aggressive investor looking for high dividend yields, though, all of this could make Seagate an even more attractive opportunity.
Seagate’s dividend currently yields around 7.5%. I wouldn’t count on dividend hikes from the company anytime soon, since it’s using nearly all of its earnings to fund the dividend program. But with that kind of yield, who really cares if no increases are forthcoming?
The obvious question is: What about the potential for dividend cuts? I don’t see that happening, either. Seagate’s payout ratio might be higher than ideal, but it’s not so high that the company should have to slash its dividend. In addition, Seagate is generating solid cash flow that should allow it to easily keep dividends coming at current levels.
And while Seagate’s latest financial results were disappointing, the long-term outlook for the company still appears to be good overall. Demand for data storage should increase in the future, particularly with continued growth in cloud computing. Seagate remains one of the top players in the market. Aggressive investors could find this an attractive high-yield stock to add to their portfolios.
Keith Speights has no position in any of the stocks mentioned. Matthew DiLallo has no position in any of the stocks mentioned. Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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