Brexit, smexit. That’s what the markets seem to be saying as we get into mid July.
But while the stock market continues to plod along as if nothing has happened, the bond market is setting new record lows for yields with nearly every passing day. As I’m writing this, the 10-year Treasury yields barely 1.4%. And many of the traditionally best dividend stocks are sitting near record-low yields as well.
That puts income investors in a bit of a pickle. Do you accept the current low yields on bonds and bond-like dividend stocks? Or do you reach for higher yield at the expense of taking potentially higher risk?
Thankfully, there are still plenty of dividend stocks out there paying a respectable yield. It just so happens that many are in areas you might not normally think to look.
Today, I’m going to break down 10 of the best dividend stocks to hold for the remainder of 2016.
Dividend Stocks to Buy for Q3: Energy Transfer Equity LP (ETE)
Energy Transfer has been something of a punching bag for most of the past year due to its ill-timed planned merger with Williams Companies Inc (WMB). Well, thankfully, that merger fell through. Williams may still win some sort of compensation from ETE in court, but for now it looks like ETE is officially off the hook.
That’s great news for ETE, and one of the reasons I consider it to be one of the best dividend stocks for 2016. With the uncertainty surrounding the merger settling down, I expect investors to start moving back into the stock. And while we’re waiting for that to happen, we can collect the attractive 8.1% cash distribution.
As of today, ETE is in second place in the Best Stocks contest. But with nearly half the year left to go, I’m expecting a win.
Dividend Stocks to Buy for Q3: Ford Motor Company (F)
I would have never imagined I’d include an automaker like Ford Motor Company (F) on a list of best dividend stocks. But such is the state of the market in 2016.
With traditional dividend favorites in the utilities and consumer staples sectors looking awfully pricey, we have to keep an open mind. And today, some of the best dividend stocks are to be found in cyclical sectors like automakers.
Whenever you look at a cyclical sector like this, you always have to consider dividend sustainability. After all, automakers are notoriously bad about getting themselves into trouble when the economy turns south.
This time around, Ford is in better shape. It’s a leaner company than it was during the last downturn and better prepared for tough times. So I would expect Ford dividend to be safe for the foreseeable future. At current prices, Ford yields an attractive 4.6%, which is about three times the current 10-year Treasury yield.
Dividend Stocks to Buy for Q3: General Motors Company (GM)
Perhaps not surprisingly, Ford’s chief U.S. rival General Motors Company (GM) is also looking like a juicy dividend stock at today’s prices. GM sports an even higher dividend yield at 5.4%.
Just think, it was just a few years ago that General Motors had to run to the U.S. government for help … and still filed for bankruptcy. My, how things can change.
Today, GM is a much healthier company with a good recent history of raising its dividend.
It’s also worth noting that GM has had some very high-profile owners these days. Warren Buffett, David Einhorn and David Tepper all hold large, multimillion-share holdings.
Even if the economy takes a turn for the worse, I’m confident that auto sales will hold up better than they have in past slowdowns if, for no other reason than the age of cars on American roads. The average age of a car on American roads is nearly 12 years. That’s the average, meaning that roughly half of all cars are significantly older than that.
At some point, cars simply fall apart and have to be replaced. Replacement demand should be strong enough to get GM through any tough times ahead.
Dividend Stocks to Buy for Q3: Enterprise Products Partners L.P. (EPD)
Up next is pipeline blue chip Enterprise Products Partners L.P. (EPD).
Enterprise Products followed the rest of the oil and gas sector lower last year, but for no real reason other than guilt by association. Unlike many of its peers in the midstream pipeline sector, Enterprise Products is conservatively run and was never at any real risk of cutting its distribution, let alone come under any kind of financial distress.
Yet that didn’t stop the stock from dropping like a rock. From late 2014 to early 2016, EPD lost about half its value.
As sentiment towards energy has improved, EPD’s stock price has risen to more reasonable levels. But I still think there is a lot more upside, particularly considering how low bond yields are today.
Enterprise Products currently yields 5.5%. And just this week, the company announced it was raising its distribution by 5%. EPD has raised its distribution every year since 1998, and I expect many more to come.
Dividend Stocks to Buy for Q3: Kinder Morgan Inc (KMI)
If you’re willing to consider a slightly more controversial stock, I’d recommend you take a look at Kinder Morgan Inc (KMI).
During the chaos of last year’s energy rout, Kinder Morgan had to slash its dividend by 75% in order to protect its credit rating. That infuriated a lot of investors and made the stock — which had previously been wildly popular among individual income investors — into something of a pariah stock.
Normally, I would avoid like the plague any stock that had recently cut its dividend. But on Kinder Morgan, I’m willing to make a major exception.
KMI’s decision to cut the dividend had nothing to do with operational issues and everything to do with KMI having too much debt at a time when the bond market was getting wobbly. At its reduced payout, Kinder Morgan is able to fund much of its new growth initiatives with internally generated cash flow.
Given the “bond-like” nature of the majority of KMI’s pipeline revenues, I consider KMI pretty close to riskless at the current dividend rate.
At current prices, KMI yields just shy of 3%. That’s not as high of a yield as some of the other stocks on this list, but it’s still double the yield on the 10-year Treasury and significantly higher than the yield on the S&P 500.
Dividend Stocks to Buy for Q3: Teekay Corporation (TK)
I’ll give you one last energy stock before moving on to other sectors. For the portion of your portfolio that you’re willing to invest a little more speculatively, consider seaborne midstream operator Teekay Corporation (TK).
Like Kinder Morgan, Teekay had to cut its dividend late last year, and for the same reason: too much debt at a time when the debt markets were going haywire.
TK is structured similarly to the way KMI was prior to its reorganization. TK is the general partner for two MLPs, Teekay Offshore Partners L.P. (TOO) and Teekay LNG Partners L.P. (TGP). TK, as a management company, has little in the way of operating income. The vast majority of its revenues come from the distributions it gets from its two MLPs and from the dividends it receives from a third entity, Teekay Tankers Ltd. (TNK).
Well, Teekay’s MLPs had to slash their distributions last year in order to ensure they’d be able to roll over some debts they had coming due … so TK in turn had to cut its own dividend.
But here’s the good news. The TK family of companies has successfully put its finances in order, so TK’s dividend should be safe for the foreseeable future. And I expect decent growth in the coming years as the credit markets settle down and the MLPs investments start to bear fruit. At current prices, TK yields 2.3%.
Dividend Stocks to Buy for Q3: StoneMor Partners L.P. (STON)
Whether the UK leaves the European Union or stays, it won’t matter one iota to deathcare provider StoneMor Partners L.P. (STON).
Death eventually comes for us all. And when it does, cemetery and funeral home operator StoneMor Partners is there to do the rest. Stonemor owns and operates 307 cemeteries and 104 funeral homes in 28 states and Puerto Rico.
It’s morbid, but with the aging of the Baby Boomers, Stonemor stands to do very well in the coming years.
More and more Americans are opting for cremation rather than traditional burial, which is less profitable for cemeteries. But Stonemor still stands to profit from its funeral services and cremation businesses.
And given the demographic tailwinds favoring the company, a shifting product mix is nothing to fear. Whatever Stonemor loses in product mix it should more than make up in volume.
At current prices Stonemor yields about 10.4%. I don’t see a lot in the way of capital gains in the next few years as the real demographic turbocharger doesn’t kick in until later. But a 10.4% current cash yield, even in the absence of capital gains, is still very attractive.
Dividend Stocks to Buy for Q3: UBS ETRACS Monthly Pay 2x Leverage Mortgage REIT ETN (MORL)
If you want to really juice your portfolio’s yield, consider a small position in the UBS ETRACS Monthly Pay 2x Leverage Mortgage REIT ETN (MORL), a leveraged play on the mortgage REIT sector.
MORL holds a leveraged position in a basket of the largest and most heavily traded mortgage REITs. Mortgage REITs have been dead money for years, but they’ve come back into focus of late due in no small part to the enthusiastic support of Jeff Gundlach, arguably the best bond manager in the world.
Gundlach has been speaking and writing favorably about mortgage REITs for months.
I should emphasize here that you should keep your position sizes small on this one. Yes, it pays a 22% dividend yield, which is fantastic. But it is also a leveraged ETN that is prone to wild price swings. Today, it trades hands at just shy of $15 per share. But over the past 52 weeks, it has traded as low as $8.16 and as high as $17.07.
I think there is still excellent upside from here. Just be aware that this one can really move … fast!
Dividend Stocks to Buy for Q3: STAG Industrial Inc (STAG)
Up next is a steady performer I’ve held for years, STAG Industrial Inc (STAG).
STAG is a small-cap REIT that specializes in light-industrial properties such as distribution facilities. I like to think of STAG as the landlord for all of that anonymous, low-profile real estate you see on the side of the highway in outlying areas. It’s not sexy, but it pays the rent … and well.
At current prices, STAG yields about 5.8%. And over its short life as a public company, STAG has been a reliable dividend grower. Over the past three years, it has raised its dividend at an 8.5% clip.
And as an added sweetener, STAG pays its dividend monthly rather than quarterly, making it a particularly good stock for retirees needing monthly income.
Dividend Stocks to Buy for Q3: Prospect Capital Corporation (PSEC)
And for one of my favorite dividend stocks, I’ll leave you with Prospect Capital Corporation (PSEC).
Prospect Capital is a business development company that provides debt and equity capital to up-and-coming companies.
Like most of its peers, PSEC took a beating when investors were convinced that the Federal Reserve would be raising rates aggressively. Higher rates means higher funding cost for Prospect Capital … and potentially higher default rates for its investment portfolio.
But as those fears have subsided, PSEC has enjoyed a nice recovery. Shares are up by more than 50% from their 52-week lows. But I think more gains are likely to come because the shares are still far from expensive.
PSEC trades for just 80% of book value, meaning you can effectively buy a dollar’s worth of assets for just 80 cents. That book value is subject to change, of course. But PSEC updates it quarterly, and it has remained relatively steady for several quarters running.
At current prices, PSEC yields a fat 12.6%. Between the yield and the discount to book value, I believe PSEC can return in excess of 20% over the coming year.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he did not hold a position in any of the aforementioned securities. As of this writing, he was long ETE, F, GM, EPD, KMI, TK, STON, MORL, STAG and PSEC.