The Top 3 Stocks From Our Sustainable High Yield Portfolio

Our Ziggma model portfolios are designed to help investors with idea generation and portfolio benchmarking. They comprise a different approach to stock research. Ziggma users can browse through a large variety of portfolios, some of which are focused on growth, others which are multi-asset or ETF only. Many Ziggma users are finding investment ideas that fit their own investment approach in our model portfolios – whether it is our very own Ziggma model portfolios or guru portfolios (called Star Investor portfolios). In this article we lay out how you can find the best dividend stocks in our Sustainable High Yield Portfolio.

Our top three stock picks

In this article we will present the top three holdings – by Ziggma Performance Score – of the Ziggma Portfolio Sustainable High Yield. This portfolio has a weighted average yield of 6.2% and an average Ziggma Company Performance Score of 85. When constructing the portfolio, we paid particular attention to the Financial Situation and Profitability sub-scores in order to ensure maximum dividend sustainability.

Sustainable Dividends are the new coupons

In today’s ultra-low yield environment and with governments drowning in debt, sustainable dividends from large, global players with dominant market positions and a high level of profitability are the new type of “coupons”. The case for high dividends is not without caveats: think value traps, beaten down stock prices, poor growth profile. We are currently preparing a blog article on this very subject. But a carefully constructed portfolio of stocks with sizeable dividend yields – without overreaching for yield, of course – represents a sensible solution for retirees or investors looking for recurring cashflows.

The main criteria upon which the Sustainable High Yield Portfolio is built

  1. Strong market position
  2. Solid profitability
  3. Very strong financial situation
  4. Low volatility

The portfolio currently has 12 positions, providing for a well diversified portfolio.
The following provides a brief presentation of each of our top 3 picks.

1. Dominion Energy (Ticker D): 4.6% yield, CP Score: 100

Dominion benefits from a solid, longstanding market position as an integrated energy company with approximately 31,000 megawatts of electric generation capacity, over 100,000 miles of natural gas transmission, distribution and gathering pipelines and more than 93,000 miles of electric transmission and distribution lines.

With a beta of 0.7, Dominion’s stock is significantly less volatile than the broader stock market. The long-term stock chart visually illustrates that with Dominion’s stock you can sleep well at night. Surely, its stock reacts to financial market distress, but much less than the broader market.

Dominion Energy stock price chart

Dominion’s financial situation is very robust, as financial leverage has been coming down. The Ziggma financial situations sub-score is currently at 87.

Dominion’s 5-year return on equity was 13% as of year-end 2019. We consider this a solid result for a company in a capital intensive industry such as Utilities. It is consistent with a profitability sub-score of 77.

2. Kinder Morgan (Ticker KMI): 6.8% yield, CP Score: 71

As the arguably largest midstream energy firm in North America with 70,000 miles of U.S. natural gas pipelines and nearly 10,000 miles of oil and refined products pipelines, KMI’s market position is extremely strong. It is one of the key oil and gas infrastructure owners in the United States, of crucial importance to the country’s functioning. Most of its revenue stems from long-term fee based contracts.

KMI’s stock is more volatile than the portfolio average with a beta of 1.12. Prior to the recent massive oil price drop, though, KMI’s beta was well below 1.

The company employs more financial leverage than the industry average. However, financial leverage is not disproportionate. And, thanks to its economies of scale, KMI can afford to employ a higher degree of leverage. Thanks to reductions in capital spending, financial leverage has consistently decreased over the past five years, thus de-risking the balance sheet.

Dominion Energy leverage ratios

Finally, KMI’s profitability has been sub-optimal, as reflected by a profitability sub-score of 62. But the company is on a good trajectory as it improved its profitability in each of the past three years.

3. Verizon (Ticker : VZ) : 4.5% yield, CP Score: 90

There is hardly any need to present Verizon, the largest wireless carrier in the US. Some numbers as a reminder: 93 million phone customers and another 24 million data devices, like tablets, via its nationwide network. Verizon Media Group, the online media and advertising firm formed with the acquisitions of AOL and Yahoo, provide a small contribution to revenue.

If you hold VZ stock you can sleep fairly well. The stock’s beta is at less than 0.5, i.e. it moves on average only half as much as the S&P 500.

VZ’s dividend is very well protected by a strong market position and a focus business model (unlike AT&T), providing the company very stable profitability, as shown by the following chart.

Dominion Energy EBITDA margin

Finally, VZ’s balance sheet has improved considerably over the past five years. Thanks to ample profit retention, Debt/Equity has come down from 4.8x to a very manageable 1.8x. The company’s dividend is quite comfortably covered by about 2x free operating cash flow.

Are you interested in discovering the names of the rest of the stocks in the Ziggma Sustainable High Yield Portfolio?

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