- My strategy involves buying high-quality, high-yield stocks at discounts, holding until they re-appreciate, and then selling to reinvest in undervalued stocks.
- I share some of the most attractive, high-quality big dividend stocks available right now.
- I detail why they are good buys.
As I have detailed in a previous article, the core of my investing strategy lies in finding high-quality, high-yielding stocks that are trading at clear discounts to intrinsic value, buying them aggressively, and then holding until they re-appreciate close to my fair value estimate. I then sell those stocks and recycle the capital into buying additional undervalued, quality, high-yielding stocks.
The reason that I favor this over a pure buy-and-hold strategy is that many times, high-yielding stocks do not generate excessive growth rates. This is due to their paying out the vast majority of their cash flows to shareholders via dividends and share repurchases. Therefore, you can value them with a fairly high degree of conviction. While it is extremely difficult to perfectly time every entry and exit—and yes, I do occasionally get some of my valuations wrong—in aggregate, across a diversified portfolio, this approach has worked very well for me and contributed to my strong total return performance over time. As a result, I find it to be worth the additional time and effort to buy and sell individual dividend stocks rather than going with a simpler approach of just buying and holding a diversified dividend ETF like the Schwab U.S. Dividend Equity ETF™ (SCHD
With that strategy in mind, here are two high-quality, high-yielding stocks that have recently gotten far too cheap after Mr. Market sold them off fairly aggressively, making them very attractive buys right now.
Discounted Big Dividend Stock #1
The first one I’m going to discuss is an energy production company called Permian Resources Corporation (PR
PR also pays out a very attractive dividend yield of 4.1%, which is well above many of its peers. For example, Devon Energy Corporation (DVN
On top of that, its strong recent production growth and status as a lower-cost producer—given its concentration in the Permian Basin—make it a very attractive buy in our view right now. With the energy sector (XLE
Discounted Big Dividend Stock #2
Another high-quality, big-dividend stock that, I think, has been sold off way too aggressively recently is the triple net lease REIT Realty Income Corporation (O
- It is a leading blue-chip REIT with one of the largest and best-diversified real estate portfolios in the world.
- It has an incredible dividend growth track record that earns it a place among the Dividend Aristocrats (NOBL
. - It also has an A- credit rating, which is among the best in the REIT sector.
Despite all of these strengths, O currently trades at a 4% discount to its net asset value. This is despite historically trading at an average 17% premium to its net asset value and as much as a 60% premium to net asset value before the COVID-19 outbreak. Moreover, Realty Income offers around a 6% dividend yield, which is also very elevated relative to its historic average of about 4.7%, and its price-to-AFFO ratio of just 12.7x is far below its historic average of 17.8x.
While some would argue that this reduced valuation is justified given that interest rates have risen meaningfully recently, it is worthwhile pointing out that O also trades at a deep discount to some of its triple-net lease REIT peers like Agree Realty (ADC
For example, EPRT trades at a much higher 17.5x price-to-AFFO ratio, a mere 3.7% dividend yield, and a whopping 30% premium to its net asset value, despite having a lower credit rating and lower-quality underlying portfolio. The only thing EPRT has that O does not is a smaller size, which allows it to grow at a higher percentage rate. However, it largely achieves this by investing in lower credit quality tenants to get higher investment spreads, thereby exposing it to higher risks.
On top of that, we see growth likely slowing for EPRT as well, as analysts only expect it to grow its dividend per share at a 2.5% CAGR through 2027,
whereas they forecast Realty Income to grow its dividend at a 4.4% CAGR over that period.
Moreover, even if EPRT outperforms analysts’ expectations, which would not surprise us, O has a much larger margin of safety built into its valuation and is also built to better withstand an economic downturn than EPRT. In our view, this makes O the slam-dunk choice over EPRT.
ADC is another example of a stock where, while its underlying quality is at least as good—if not slightly better—than O’s, it is less diversified. Yet, its valuation is much richer, as it trades at a 17.3x price-to-AFFO, has a 4.2% dividend yield, and is priced at a 16% premium to its underlying NAV.
However, there is not a strong case to be made that O deserves to be put in the penalty box due to higher interest rates, but ADC and EPRT do not. As a result, we would much rather own O than either of these similar-to-poorer quality-yet-far-more-expensively-priced peers.
Investor Takeaway
As this article points out, while some dividend stocks appear fairly or even richly valued right now, there are some other exceptional bargains. With PR, O, and many other high-yielding stocks right now, you can buy high-quality businesses at steep discounts to their intrinsic value.
Photo by Nicholas Cappello on Unsplash