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Like Dividends? I Bet You'll Love These 2 Stocks

How does a 5.4% dividend yield sound? What about a 6.7% yield?

Since the S&P 500 Index's yield is only around 2% today, I bet those numbers caught your attention. The best part: While Simon Property Group (NYSE: SPG) and Enterprise Products Partners (NYSE: EPD) are in out-of-favor industries, both are financially strong -- and still growing their distributions. There's a lot to love about this pair of high yielders.

Here's a primer to help you decide if they are good fits for your portfolio.

1. Simon Property Group: The mall is not dead

The so-called "retail apocalypse" has investors worried that every mall in America is going to get shut down because all shopping will eventually be done online. But that's not likely to happen. What is likely is that less desirable malls in weaker locations will close, and well-maintained malls in good locations will adjust to the changes taking place in consumer shopping habits. And Simon is one of the best-positioned mall owners in the world, actively working to keep its malls as desirable as possible.

Image source: Getty Images

Its portfolio of more than 200 malls includes traditional enclosed malls and outlet centers. Although largely located in the United States, it also owns malls in Europe and Asia. While it is focusing on repositioning its U.S. malls to handle store closures, it is actively building outlet centers overseas -- so it is still growing, despite Wall Street's fear about mall properties. And, perhaps most important, its malls are generally high-end assets located in desirable markets. Yes, investor fears about malls are justified, but not every mall -- or mall real estate investment trust (REIT) -- is in trouble.

For dividend investors, Wall Street's tendency to throw the baby out with the bathwater is a great opportunity to pick up a strong REIT with a fat 5.4% yield. Not only is Simon's balance sheet investment-grade rated, but it has increased its dividend for 10 consecutive years. It actually increased its dividend twice in 2019, upping the disbursement by 5%. If Simon is doing well enough to keep hiking its dividend while it works through an industry rough patch, it is at least worth a closer inspection by dividend-focused investors.

Some key stats to look at here include a robust occupancy of 94.7%, still increasing sales in the REIT's malls (sales hit $680 per square foot in the third quarter), and its ability to charge 22% higher rents on new leases it signs. Now add in the handful of construction projects it has overseas and there's worthwhile growth potential here, too. Simon is doing just fine, and income investors should take a closer look while Wall Street is still too scared to see the underlying strength here.

2. Enterprise Products Partners: Oil prices don't matter

The entire oil industry is out of favor today as well. But like malls, investors aren't being discriminating enough.

While volatile oil prices are a material headwind for oil drillers, midstream energy players like Enterprise Products Partners aren't affected as much. This master limited partnership owns the pipelines, processing facilities, and storage assets, among other things, that help move oil and natural gas around the world. Roughly 85% of its gross operating profit comes from fees -- and that means it largely gets paid for the use of its assets. Even though demand fluctuates a little bit here and there, it remains very strong overall, and it will likely stay that way for a long time. Renewable power is growing, but it can't replace oil overnight.

SPG data by YCharts

Enterprise is also one of the largest energy companies in North America. It has capital spending plans of roughly $6 billion to support future distribution increases, and it covers its current distribution by an incredibly strong 1.7 times (1.2 is considered good in the midstream space). It has increased its distribution annually for more than two decades. And, like Simon, Enterprise has an investment grade-rated balance sheet (it's among the least leveraged players in the midstream space).

There's simply a lot to like about Enterprise Products Partners. That said, there's one thing investors need to be aware of. Distribution growth has slowed down to the low-single digits recently, after historically trending in the mid-single-digit space. This is not a sign of weakness, however -- management has made the choice to temporarily pull back on distribution growth so it can self-fund more of its capital spending plans. That will allow Enterprise to reduce the number of dilutive units it sells, making it an even more desirable long-term investment. This transition should be over in a year or so, and distribution growth is likely to pick back up to more historical levels.

For dividend investors willing to look past the headlines, Enterprise and its 6.7% yield are worth a deep dive today. Concerns about oil and natural gas prices just aren't that big a deal to this midstream player.

The second level

First-order thinking is that oil prices are low and going to stay that way, and that online shopping has killed the mall. Second-order thinking is that Enterprise doesn't care that much about oil prices, and Simon owns desirable malls that are still doing just fine and adjusting to the changing times. Wall Street is stuck on first-order thinking today, and lumping Enterprise and Simon into groups that don't make sense. Each is a financially strong company with a robust and growing business -- and, better yet, a growing dividend. If you love dividends, you'll want to do a deep dive on both of these high-yield stocks right now.

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Reuben Gregg Brewer owns shares of Simon Property Group. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.


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