Toronto-Dominion Bank(NYSE: TD) has a 5% dividend yield. Realty Income's (NYSE: O) yield is 5.7%. And Brookfield Renewable(NYSE: BEP)(NYSE: BEPC) offers a yield of as much as 6.9%. Even after the big market drop, the S&P 500 index (SNPINDEX: ^GSPC) is only yielding around 1.4%. But the big yields aren't why I like each of these high-yield stocks. Here are my thoughts on each and why I believe each one is worth buying now.
1. Toronto-Dominion's troubles predate the market's sell-off
Toronto-Dominion's lofty yield didn't come about because of the market sell-off. It arose because the bank's U.S. business was used to launder money, which got it in trouble with U.S. bank regulators. There was a large fine, the company is upgrading its internal controls, and TD Bank, as it is more commonly known, is operating under an asset cap in the U.S. The asset cap is the big problem because it basically means TD Bank can't expand its U.S. business until regulators are convinced the money laundering issue is in the past. That could take a few years.
The thing is, TD Bank is a Canadian bank that operates in what amounts to a government-approved oligopoly in its home market, where it isn't facing any material regulatory scrutiny. So the foundation remains very strong. And while the U.S. business was expected to be the bank's growth engine, the regulatory issues are likely to pass in time. So, TD Bank will, eventually, get back on to the growth path. In the meantime, investors can collect a historically high 5% dividend yield while they wait out the market's turbulence.
2. Realty Income's properties have value
Realty Income is a real estate investment trust (REIT) that is focused heavily on owning single-tenant retail properties, which make up nearly 75% of the company's rent roll. That concentration often concerns Wall Street during times of economic uncertainty. That can be a buying opportunity, if history is any guide. Right now the 5.7% yield is near its highest levels of the past decade.
But the interesting thing about owning retail properties is that a tenant leaving isn't the end of the world. If the property is well located a new tenant can be found and will often pay a higher rent. The worst-case scenario is that the building gets sold. But here's a fun fact: during the Great Recession, when there were real concerns that the global economic system was going to collapse, Realty Income's occupancy never fell below 96%. In other words, Realty Income has a big yield that looks like it will be safe right through the current instability.
3. Brookfield Renewable is an a growth business
Last up is Brookfield Renewable, which is usually considered a utility. But when you step back, it is really operated like a private equity shop. This is because it is run by Canadian asset manager Brookfield Asset Management(NYSE: BAM), which uses an active portfolio approach to managing Brookfield Renewable's portfolio of renewable power assets.
Effectively, Brookfield Renewable tends to buy clean energy assets when they are cheap. It then invests in them to improve operations or strengthen their finances. And it will happily sell businesses that have appreciated in value so it can start the process over again with a new asset. That's very different from how regulated utilities operate.
There are two versions of the company that can be bought, a partnership unit with a 6.9% yield or a corporate class with a 5.5% yield. They represent the same exact entity; the yield difference comes about because there's more demand for the corporate share class (some institutional investors can't own partnerships).
The real draw here, however, is that investors are downbeat on clean energy despite the fact that it is still a growing industry. Brookfield Renewable is uniquely positioned to thrive because it is financially strong. That allows it to buy renewable power assets that are struggling and fix them up at a time when other investors are avoiding such businesses. At the other extreme, high-performing renewable power assets are still fetching good prices. So Brookfield Renewable is able to sell once-troubled assets for a premium price after it mends them. In fact, the worst-case scenario is that Brookfield Renewable ends up holding on to high performing, cash-generating clean energy assets backed by long-term contracts. But since the shift toward cleaner energy sources remains a multidecade growth driver for the business, that seems like an acceptable risk.
Opportunities in the upheaval
It is emotionally hard to buy when investors are worried and the market is gyrating wildly. And dividend investors do need to be selective during times like these. But TD Bank, Realty Income, and Brookfield Renewable have fundamental strengths that make them attractive investments. The lofty yields they each offer are, in some ways, just the icing on the cake.
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Reuben Gregg Brewer has positions in Brookfield Renewable Partners, Realty Income, and Toronto-Dominion Bank. The Motley Fool has positions in and recommends Brookfield Asset Management and Realty Income. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
