Buy These Smart 5-7% Yields While The Market Chases Growth

It certainly doesn’t hurt to own high-flying stocks like Dell Technologies Inc. (DELL) and NVIDIA Corporation (NVDA) these days, as the capital appreciation on these stocks over the past year has been equivalent to multiple years of market-level performance.

Holding those stocks, however, can represent a dilemma for some investors, as it’d be unrealistic for any stock, no matter how great the business, to sustain the types of rallies they’ve recently had over the long run.

This means that investors could see years of subpar performance following initial years of huge rallies. That’s because the market trades on sentiment and future expectations, many of which have already been baked into their lofty share prices.

That’s why I’d rather buy undervalued stocks that are expected to give steady market-level or market-beating performance over the long run, thereby allowing me to dollar-cost-average the dividends into acquiring more shares at reasonable prices.

This brings me to the following 2 stocks, which are far from being overvalued, and are what I would consider to be undervalued with high dividends, offering investors the potential for steady long-term growth due to their income streams and capital appreciation, so let’s get started!

#1: TC Energy – 7.3% Yield

TC Energy Corporation (TRP) is a sizable energy midstream company headquartered in Calgary, Canada, with network pipelines, power-generating, and storage assets in the U.S., Canada, and Mexico. It moves about one-quarter of North American Natural gas and one-fifth of Western Canadian crude oil.

Like its Canadian peer Enbridge Inc. (ENB), TRP derives most (95%) of its earnings from highly regulated or contracted cash flows, thereby resulting in stable earnings during economic volatility.

This is reflected by recent results, with EBITDA growing by an impressive 11% YoY during Q1 2024, driven by all-time records across multiple natural gas systems including NGTL, Columbia Gas, and Columbia Gulf. As shown below, liquids and natural gas pipelines made meaningful contributions to TRP’s EBITDA growth.

Moreover, TRP placed around $1 billion of projects into service during Q1. This includes various projects on the NGTL (a system that connects natural gas production in western Canada to domestic and export markets) as well as the $300 million Gillis Access project which will contribute to cash flows this year.

In total, TRP has $7 billion worth of new projects that are expected to be placed into service this year. This includes TRP’s much awaited Coastal GasLink project that was completed last year and is currently undergoing post-construction reclamation activities.

Coastal GasLink is expected to be placed into commercial service later this year, and could be a material driver of cash flows for TRP. This supports management’s guidance for 2% to 5% comparable EBITDA growth this year, after seeing 11% growth in 2023, as shown below.

Meanwhile, TRP maintains a sound balance sheet with a BBB+ credit rating from S&P. It has a long average debt term of 17 years with 92% of it being held at fixed rates. Management reiterated its commitment to getting its debt-to-EBITDA ratio down to 4.75x, which would put it about on par with the 4.6x debt-to-EBITDA of Canadian peer, Enbridge.

Importantly for income investors, TRP currently yields an appealing 7.3%, and the dividend is covered by an 82% payout ratio. TRP has also grown its dividend annually for 23 consecutive years, and management is guiding for 3-5% annual dividend growth in the medium term. It’s worth noting that with the pending spin-off of South Bow (TRP’s liquids pipelines business), shareholders are expected to be made whole with regards to the dividend, with 86% dividend share coming from RemainCo (TC Energy) and 14% coming from SpinCo (South Bow), as shown below.

TRP is attractive at the current price of $38.39 with a Price-to-Cash Flow of just 7.45x, which sits at the low end of its 3-year range of 6-11x. Plus, TRP is competitively priced compared to peer Enbridge’s 7.74x P/CF, as shown below.

With a 7.3% yield and management’s guidance for comparable EBITDA CAGR in the 3-5% range, TRP could produce market-beating returns even without a reversion to a mean P/CF valuation in the 8-10x range.

#2: VICI Properties – 5.9% Yield

VICI Properties Inc. (VICI) is the largest REIT in the U.S. that’s focused on experiential properties, with a property base that includes irreplaceable assets along the Las Vegas strip and beyond, and a growing presence in non-gaming family entertainment destinations.

What makes VICI stand out from its net lease peers is ultra-long leases that range from 30-55 years among its top 13 tenants. This sits far longer than the 10-year average for net lease operators like Realty Income Corporation (O), NNN REIT, Inc. (NNN), and Agree Realty Corporation (ADC).

VICI also benefits from having substantial exposure to tenants that are listed on the S&P 500 (SPY), where it derives 75% of its rent roll. Additionally, 81% of VICI’s rent roll comes with master leases, which means that a tenant with multiple leases with VICI still needs to pay rent on a vacated property.

VICI has been able to produce higher AFFO per share growth compared to peers due to its greenfield opportunities, dealmaking, and business scope. This is reflected by AFFO per share growing by 6.1% YoY during Q1 2024, which is higher than the low to mid-single digit AFFO growth of its net lease peers during the same time.

Notably, VICI’s recent growth is supported by non-gaming properties, including a market-leading sports training complex called Homefield in Kansas City, MO. This complex will soon feature a Margaritaville resort and builds upon VICI’s entry into the sports and recreational segment late last year with the acquisition of a leasehold interest in Chelsea Piers (an entertainment destination along the Hudson River in New York City).

Management is guiding for a respectable 4.2% growth in AFFO per share this year to $2.15 at the midpoint of the range. This is supported by annual rent escalators and value-enhancing projects, including those at the Venetian resort in Las Vegas, as highlighted by management during the recent conference call:

Our focus on trust in finding mutually beneficial solutions with our partners multiplies the beneficial impact of each relationship and we believe lays the groundwork for future growth through both good and bad market environments. One of the best examples of this is our relationship with Apollo and the team at the Venetian.

Since [the acquisition], the team at the Venetian has outperformed all expectations as Las Vegas has continued to solidify itself as the entertainment center of the world. We are thrilled to further expand our close relationship with Apollo and announced our opportunity to invest up to $700 million at the Venetian through VICI’s Partner Property Growth Fund. This capital investment will fund several projects that seek to improve the overall guest experience and enhance the value of the property.

VICI’s outlook is supported by a strong balance sheet with a BBB- credit rating from S&P and $3.5 billion in total liquidity. It also has a net debt to annualized Q1 EBITDA ratio of 5.4x, sitting within management’s target of 5.1x to 5.5x, and below the 6.0x mark generally considered safe by ratings agencies.

Importantly for income investors, VICI currently yields an appealing 5.9%. The dividend is well-covered by a 66% payout ratio and comes with a 5-year CAGR of 7.8%. VICI’s stock is also attractive at the current price of $28.30 with a forward P/FFO of 11.1, sitting below that of Realty Income’s 12.3, NNN REIT’s 12.5, and Agree Realty’s 14.8.

As shown below, it also sits below its historical P/FFO of 16.2. With a 5.9% yield, VICI can be viewed as being far more than a ‘bond proxy’ considering its strong balance sheet and forward growth prospects. With expectations for at least 4% AFFO/share growth this year, VICI could deliver market-level performance in combination with the dividend even without a reversion to its mean valuation.

Investor Takeaway

Both TC Energy and VICI Properties present attractive investment opportunities for those seeking steady long-term growth and reliable income streams. TC Energy, with its extensive and strategically located energy infrastructure, offers a stable dividend yield of 7.3% backed by regulated and contracted cash flows.

VICI Properties sports a 5.9% yield supported by long-term leases and strategic investments in high-value assets like the Venetian in Las Vegas. Together, these companies exemplify robust dividend growth, strong balance sheets, and strategic expansions that make them attractive choices for income-focused investors seeking quality at discounted prices.