Investing in high-yield stocks can be extremely lucrative, but they can be equally destructive if you pick the wrong ones. The biggest mistake investors make with high-yield stocks is buying yield traps, where a yield looks very high but is likely to get cut in the near future. Companies with incredibly high yields don't need to grow at double digits to be great wealth-compounding machines, but they do need a strong enough business to ensure dividend payments will last years into the future with some modest growth along the way.
If you are on the hunt for ultra-high-yield dividend stocks, then you have undoubtedly been looking in the energy sector, as there are dozens of stocks in this sector with yields over 6%. One to put on your radar is Cheniere Energy Partners (CQP) and its 6.5% yield. Conversely, if you run across Green Plains Partners' (GPP) 14.4% yield, you may want to look elsewhere. Here's why one of these looks like a solid buy while the other has some serious red flags.
Stable base with a few shareholder-enhancing opportunities
Cheniere Energy Partners is a unique business. It is the subsidiary partnership of Cheniere Energy, which owns and operates one of Cheniere's two liquified natural gas (LNG) export facilities. This facility recently completed an expansion that allows it to produce and export about 30 million tons of LNG per year. So far, Cheniere has proven to be a top-flight operator that generates steady cash flows. Many will point to the contracts it has in place to export LNG as a sign of strength, but it is only part of the story. What is truly impressive is the company's ability to run the facility efficiently. Global utilization rates for LNG facilities tend to hove around 80% and require lots of downtime for maintenance. Cheniere has been able to maintain a 93% utilization rate and has actually increased the operational capacity 12% above the nameplate capacity of its facilities when they were originally designed.
Fixed-fee contracts and exceptional operations have allowed Cheniere Energy Partners to generate more cash than originally anticipated, so management recently implemented a new dividend plan to reflect that. It will now pay both a fixed-base dividend and a variable-rate dividend based on excess cash flow. Currently, it doesn't have significant capital spending plans, so much of its cash from operations can either pay down debt or give back to shareholders. Management has a long-term plan to increase capacity at Cheniere Energy Partner's facility by as much as 50%, but the timeline is far enough out that it can afford to pay shareholders outsized dividends for some time.
Cheniere energy Partners' stock currently has a dividend yield of 6.5%. Considering the stability of its cash flows, a track record for exceptional operations, and a long-term option for growth on the horizon, this looks like a stock worth considering today.
A compelling story, but poor business economics
In theory, a business that pays a high yield today and is focused on biofuels sounds like a compelling investment. And there are some superficial things about Green Plains Partners' business that might get some people to think this business is headed for a bright future. Market research reports say that the biofuel market is expected to grow 7% annually all the way to 2030, and Green Plains Partners is positioned as a company providing logistics, transportation, and storage. So a company that benefits from growing volumes should, in theory, capture that growth. What's more, Green Plains Partners' debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of only 1.5 times suggests it has the balance-sheet strength to spend on growth.
Unfortunately, the business itself has fallen well short of meeting that promising story. Green Plains Partners' growth is going to rely heavily on the plans of its parent company, Green Plains (GPRE -2.58%). Unfortunately, Green Plains' business model has shifted significantly in recent years. What used to be a company that produced ethanol from corn and made animal feed from the byproduct, Green Plains is now more interested in its animal feed programs and other specialty products.
Both animal feed and specialty products such as specialty alcohol and corn oils are higher margins and greater growth opportunities. Ethanol, conversely, is becoming a smaller part of the renewable fuel mix as new bioprocessing units can create chemically identical fuels more efficiently. If that wasn't enough of a reason to change course, the economics of ethanol have been highly dependent on renewable fuel credits, but Congress has in the past let funding for these programs lapse.
These industry dynamics have led declining cash from operations at Green Plains Partners since 2017. What's more, the company's distribution coverage ratio of 1.06 times means almost every dollar coming in the door needs to be used to pay its distribution. With its parent company heading in a different direction, there are few opportunities for Green Plains Partners to grow its operations. That forward yield of 14.4% may look tempting, but there aren't a lot of reasons to think this payout will last for a long time.
