September 22, 2023

Jim Cramer says these 14% yield stocks are a trap – here are 3 dividend plays that could be more reliable

While double-digit dividend yields may seem attractive to income investors, it’s critical to exercise caution when approaching these ultra-high-yielding names.

In a recent Lightning Round segment of CNBC’s “Mad Money” program, a viewer asked host Jim Cramer about Annaly Capital Management Inc. (NYSE:NLY) — a mortgage real estate mutual fund (mREIT) with eye-popping returns.

The company pays quarterly dividends of 65 cents per share, giving the stock an annual return of 14%.

But Cramer is not a fan.

“That’s a stock that I think is a trap,” he said. “It always seems like it has a high yield, but the fact is it’s been a terrible performer for years and years. I want to stay away from it.”

While Cramer has warned investors about the potential pitfalls of this high-yield stock, there are other dividend plays in the market. Here are three that Wall Street finds particularly attractive.

Checking out:

Realty Income (NYSE:O)

Realty Income is a REIT that bills itself as “The Monthly Dividend Company,” and it deserves that title. Throughout its 54-year company history, the company has declared 636 consecutive monthly dividends.

Better yet, Realty Income has increased its payout 121 times since going public in 1994.

Today, the REIT pays monthly dividends of 25.5 cents per share, which translates into an annual return of 5.1%.

The amount isn’t quite as high as the 14% yield that Annaly Capital offers, but keep in mind that the average dividend yield of S&P 500 companies is currently just 1.6%.

Stifel’s Simon Yarmak has a Buy rating for Realty Income and a price target of $71.25, implying a potential upside of 19%.

While publicly traded REITs are popular, new companies have come up with innovative ways for people to earn passive income from the real estate market. Here’s how you can invest in rental properties with as little as $100 while remaining completely hands-off.

First Energy Corp. (NYSE:FE)

FirstEnergy is an electric utility company headquartered in Akron, Ohio. It has 10 electric distribution companies serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York.

Utilities have long been a staple of dividend investors because of their reliability. No matter what happens, people will always have to turn on their lights at night.

FirstEnergy has a quarterly dividend rate of 39 cents per share, which equates to an annual return of 4% at the current share price.

In the first quarter, the company earned net income of $292 million, or 51 cents per share. In its results release, FirstEnergy reaffirmed its long-term target of annual growth in operating earnings per share of 6% to 8%.

Shares are down 7% so far, but Morgan Stanley analyst Stephen Byrd sees a recovery on the horizon. Byrd has an Overweight rating on FirstEnergy and a price target of $45 — about 15% above where the stock currently stands.

Energy Transfer LP (NYSE:ET)

Energy Transfer owns one of the largest portfolios of energy assets in the US

With approximately 120,000 miles of pipeline and associated energy infrastructure, the partnership has a strategic network spanning 41 states and all major production basins in the country.

In April, Energy Transfer announced a quarterly cash payment of 30.75 cents per unit. At the current unit price, the amount translates into an annual return of 9.7%.

In the first quarter, Energy Transfer’s distributable cash flow (DCF) attributable to partners was $2.01 billion, which exceeded the amount required to pay cash distributions to partners for the quarter.

“Based on costs incurred, we had a DCF surplus of $640 million after distributions of $967 million and growth capital of $407 million,” said Energy Transfer Co-CEO Tom Long on the earnings conference call.

JP Morgan analyst Jeremy Tonet has an Overweight rating on Energy Transfer and a price target of $18. Since the stock is currently trading at $12.75, the price target implies a potential upside of 41%.

There are many high-yield plays in the midstream energy space. If you prefer a diversified approach rather than picking individual stocks, you may want to look into exchange-traded funds that focus on the sector. The USCF Midstream Energy Income Fund (NYSE:UMI), for example, aims to provide “a high level of current income” and capital appreciation and provides exposure to a range of midstream energy assets. Energy Transfer is currently the second largest holding company.

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