The Big Labor Day Sale on High-Yield Dividend Stocks

Accelerating Dividends, Defensive Investing

Sometimes I feel we have lost the meaning for certain holidays, and today Labor Day is one of those. However, I am not one to dwell on what things were, or “should” be.

This holiday has turned into one when a lot of the things I am interested in are on sale. I am personally looking at solar power systems to power my off-grid, but high-comfort camping adventures.

A 40% discount sale price on something you want to buy is a great deal! When you can buy a quality stock at a 40% discount, most investors are too scared to pull the trigger. They are more likely to sell shares and lock in that 40% loss.

I understand it seems different, especially if a stock you bought has declined to a value much lower than what you paid for the shares. Yet, at one point, you bought the shares at a price that you viewed as a good value. If you don’t think this way, ­consider viewing lower share prices as “stocks on sale.” This especially applies if you buy dividend-paying stocks since a lower share price gives you a higher yield on any added shares you purchase.

The month of August was tough for stocks. The broad coverage S&P 500 dropped by about 4%. The high-yield energy midstream sector was down close to 10%. Energy midstream are the companies that own and operate pipelines, storage facilities, processing plants, and terminals. This group of stocks has been in a two-month decline, and stocks in the sector are definitely “On Sale.”

Related: How Much Could You Make When Your Dividend Stock Pays an 18% Yield?

Despite the falling stock market values, the fundamentals for energy midstream companies are as strong as they have been for years. Dividend payouts are well covered, and over half the sector contains growing dividend rates. The recent sell-off is entirely the result of fear selling. The sector is deeply undervalued.

That point was made clear last week when The Blackstone Group (BX) infrastructure fund made a 100% acquisition offer for Tallgrass Energy LP (TGE) at a 36% premium to the previous closing price. The TGE buyout offer marks the bottom of the sector decline and is a positive catalyst for share price gains going forward.

While it may be too late to get much of a capital gain on TGE, there are plenty of energy midstream stocks with super cheap sale prices and excellent yields. Here are three to consider:

Targa Resources Corp (TRGP) has three separate lines of energy sector services. It engaged in the businesses of:

  • Gathering, compressing, treating, processing, and selling natural gas.
  • Storing, fractionating, treating, transporting, and selling NGLs and NGL products, including services to LPG exporters.
  • Gathering, storing, terminaling, and selling crude oil.

This was a $50 plus stock a year ago, and the company’s financial position is much stronger now.

The share price has dropped to $34, with an 11% current yield.

Energy Transfer (ET) is one of the largest and most diversified midstream energy companies in the country with more than 86,000 miles of pipelines traversing 38 states transporting the oil and gas products.

The company claims to move approximately 30% of the U.S. transport of crude oil and natural gas.

Investors are leery of ET’s high debt load, but distributable cash flow coverage of 2.0 times the dividend rate means that the 9% yield is well supported, and excess cash flow can be used to pay down debt.

The ET share price is down 28% from recent levels.

Related: High-Yield Buyout Prospects As the Energy Sector Finds A Bottom

NGL Energy Partners LP (NGL) is a small-cap master limited partnership (MLP) that provides a range of services to energy producers and end-users.

These services include transportation, storage, blending and marketing of crude oil, NGLs, refined products/renewables, and water solutions.

Over the last two years, the company has sold several low-profit divisions and expanded in the services with higher margins. Free cash flow should continue to improve.

This $13 stock could be $18 before the end of the year — current yield: 12%.

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