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Most investors look at high-yield dividend stocks as a source of income. While they certainly provide that, what many investors probably don't know about them is that they're also more likely to outperform the market than their stingier peers and do so with less volatility. It's that lower-risk upside that makes them so appealing to me.
That's why I own several high-yield stocks. However, of that group, three currently stand out as having the greatest probability of delivering market-beating returns from here: Kinder Morgan (NYSE: KMI), Brookfield Property Partners (NASDAQ: BPY), and Crestwood Equity Partners (NYSE: CEQP), Because they're my highest conviction ideas, I'd buy any one of them right now.
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What more could you want?
Not only does natural gas pipeline giant Kinder Morgan currently yield an attractive 4.5%, but that payout is also on an increasingly improving foundation. For starters, the company expects to generate enough cash flow this year to cover its dividend and fund all its growth-focused spending with about $500 million to spare. Meanwhile, it has worked hard to pay down debt, which has driven its leverage ratio below its target level. Therefore, it could soon win a credit rating upgrade.
However, despite all this progress, Kinder Morgan's stock trades at less than 9 times cash flow, which well below the rough average of 11 of its peer group. That discount doesn't make sense to me, which is why I think shares have considerable upside from here. Especially since the company expects to grow its dividend 25% per year in 2019 and 2020, which means it will yield almost 7% in 2020 if shares don't budge. I find that highly unlikely, which is why I'm seriously considering adding to my already large position in the pipeline giant.
Prime real estate for a cheap price
Brookfield Property Partners owns one of the largest real estate portfolios in the world, consisting mainly of high-quality office and retail properties. These assets generate very stable cash flow, which helps support the company's 6.4%-yielding distribution to investors. The company further supports that payout with a rock-solid balance sheet, backed by an investment-grade credit rating and low leverage metrics for a real estate company.
However, as good as that income stream is, what makes Brookfield Property Partners such a compelling buy right now is its valuation. While units of the real estate partnership currently sell for around $20 apiece, the net asset value of its property portfolio is worth $29 per unit. Meanwhile, that value should grow in the coming years because the company believes it can increase its cash flow at an 8% to 11% compound annual growth rate through 2021 because of its development projects and other growth initiatives. That should support 5% to 8% growth in its distribution each year while expanding the net asset value of the company up to between $40 to $47 per unit in five years, according to Brookfield's estimates. That long-term upside is why I'm thinking about adding to my position of this core real estate holding.