Based on prices and dividends at the time of writing, the average dividend yield of stocks in Vitesse Energy (NYSE: VTS)the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI)And Vortex (NYSE: WHR) is 7.8%. All three are attractive, but they all carry risk. Before you add these three stocks to a high-yield portfolio, here’s what you need to know.
Vitesse Energy (dividend yield of 9.1%)
Vitesse is an oil and gas exploration and production company with a difference. Instead of owning and operating assets, it focuses on investing in minority stakes in assets produced by other leading companies. In addition, management follows a discretionary strategy of hedging a portion of oil production to protect the downside risk of a decline in the oil price.
It is an attractive model because it focuses the company’s value-creating activities on what management does best: acquiring productive interests in oil wells and then generating cash flows from oil and gas production.
That said, it makes sense to look at the risks. First, as noted, the hedging strategy is discretionary, so you are always somewhat dependent on management’s ability to hedge appropriately. Second, a significant drop in oil prices will still hurt Vitesse Energy, as it will make oil production less cost-effective for oil producers. Third, management may not be able to identify value-enhancing acquisitions.
All in all, Vitesse is attractive to investors who are bullish on oil and are happy with the price around current levels. If you also have confidence in the management team led by veteran Bob Gerrity, then Vitesse is an excellent stock to add to a diversified income-generating portfolio.
The JPMorgan Equity Premium Income ETF (dividend yield of 6.8%)
The first important thing to understand about this ETF is that it invests at least 80% of its assets in actively managed US stocks. This means that investors get exposure to the US stock market and the dividend yields generated by the stocks the ETF holds.
Second, the company invests up to 20% of its assets in purchasing equity-linked notes (ELNs) that sell out-of-the-money call options on the S&P 500which is a hedge against volatility and significant declines in stocks. It is worth noting that it allows the ETF to collect a premium when the S&P 500 performs negative in the month or slightly up, but the ETF will lose money on the ELNs in a strongly positive month for the S&P 500.
In short, you can expect the ETF to be positive but underperform the market in strongly rising markets (but still provide a good income), as the increase in stock value will be offset by losses on the ELN strategy. Yet, the ETF’s downside is protected when stock markets fall due to the ELN strategy.
The fund invests best in a moderately rising equity market environment, allowing for dividend income, premiums from the ELN strategy and capital growth from equities.
This is evident from the company’s track record.
Overall, it is a good option for investors looking for a monthly income and for investors concerned about the downside risks of the stock market.
Whirlpool (dividend yield of 7.5%)
This company faces significant short-term risks, but has plenty of long-term opportunities. Persistently high interest rates and a related slowdown in existing home sales are negatively impacting consumer purchases of major appliances (MDAs).
That’s holding back MDA’s North American sales and putting pressure on profit margins, as discretionary purchases can have higher margins (think planned kitchens) versus lower-margin replacement demand for items like refrigerators and washing machines. As a result, management lowered its full-year margin, profit and cash flow forecasts in its latest earnings call.
If Whirlpool’s end market conditions deteriorate further, it could impact its dividend or at the very least its plans to reduce its $6.3 billion in long-term debt.
On the other hand, management believes that the spring price increases helped the North American MDA segment profit margins improve to 6.3% in the second quarter, compared to 5.6% in the first quarter. Furthermore, management expects North America MDA to close the year with margins of 9%.
Additionally, the remaining three segments (responsible for 38% of segment profit in Q2) all saw year-over-year profit growth in Q2.
The stock’s upside comes from a potentially better interest rate environment and a recovery in the housing market, although that may not start until 2025. Until then, Whirlpool will have to survive. Things may get worse before they get better, but the stock appears to be a good value with a trailing price-to-earnings ratio of less than 10.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vitesse Energy. The Motley Fool has a disclosure policy.
3 High Yield Dividend Stocks That Can Make You Tons of Money was originally published by The Motley Fool
