3 High Yield Stocks That Beat The 10 Year Treasury

Lately investors have been smelling value in treasuries. Long term yields are finally starting to rise, leading to great income opportunities in the 10 and 30 year treasury bonds. Today, you can grab the 10 year treasury at a 4.8% yield, near the highest it’s been in years. At a time when the S&P 500 only yields 1.62%, that yield really stands out.

There’s a case to be made that treasuries are worth owning today. Their yields are undeniably high, and Buffett is buying them in large volumes. Indeed, treasuries have far higher yields than the stock market as a whole today.

Nevertheless, there are individual stocks that currently offer much more yield than the 10 year treasury does. If you look at sectors like pipelines, REITs and non-bank lenders, many of them have yields pushing 10%. The trick, of course, is figuring out which ones are real opportunities and which are mere yield traps. In this article I will explore three high yield stocks that easily beat the 10 year treasury yield while still having safe and well covered dividends.

Oaktree Specialty Lending

Oaktree Specialty Lending (NASDAQ:OCSL) is a non-bank lender with a whopping 11.5% yield. It gets that yield by paying out a full 90% of its earnings as dividends, so there’s not much room for aggressive compounding. Nevertheless, the company has managed some growth over the last 12 months, with revenue up 36% and EPS up 43%.

Oaktree Specialty Lending is a business development company, meaning it lends money to distressed companies. Sometimes these loans can be pretty risky but the upside is that they usually have very high yields. Also, the majority of OCSL’s loans (88%) are first or second lien, meaning they take priority over other loans and are backed by collateral. So, on most of its loans, Oaktree has recourse to the borrower’s overall assets should they default.

OCSL stock has not given investors a thrilling ride since it was founded. Since the company went public in 2008, it has declined 38% in price. Granted, it paid some very large dividends along the way–enough to provide a modestly positive return from inception–but it has nevertheless been a long term underperformer.

That may be starting to change. Thanks to the high interest rates that prevail in today’s market, OCSL is able to write some very high yield loans. Its portfolio yield is 12%, and 11.5% of it is paid to shareholders. This is much higher than the yield OCSL had at inception. Even if the stock price just stays flat, you can get a hefty return on its dividends.

Lastly, OCSL has a pretty good balance sheet. It has $183 million in current assets to $46.9 million in current liabilities. This provides a 3.9 current ratio, suggesting high liquidity. The debt/equity ratio is 1.14, which is pretty good (i.e. low) for a lender.

Kinder Morgan

Next up we have Kinder Morgan (KMI). With a 6.95% dividend yield, it easily surpasses the payout you’d get with the 10 year treasury.

Why is KMI’s yield so high?

For one thing, high yields are fairly standard with pipelines. The sector is known for paying a very high percentage of earnings to shareholders in the form of dividends. Pipelines are somewhat like REITs, in that they “lease” infrastructure to end users (oil and gas companies) who pay tariffs, which are kind of like a form of rent. This business model produces very stable and dependable revenue which can be used to pay large dividends. The downside is that because pipelines have such high dividend payout ratios, they have to borrow extensively to finance their growth.

For a pipeline, KMI’s dividend safety is respectable. It has a 102% payout ratio based on earnings, though the free cash flow based payout ratio is only 94%. By pipeline standards these are relatively solid payout ratios.

Where Kinder Morgan scores less well is on its balance sheet. The company has $2.7 billion in current assets to $5.6 billion in current liabilities, for a 0.48 current ratio. Normally you want this ratio to be above one. The debt to equity ratio is 0.94 which is actually rather good for a pipeline. I believe it suggests that rising interest rates won’t damage solvency at Kinder Morgan, certainly not as much as they would for the average pipeline.

Bank of America Preferreds

Last but not least we have Bank of America Preferred Shares (BAC.PR.L). I touched on these in a recent dedicated article, and they’re worth touching on here too.

Bank of America’s BAC.PR.L preferreds have a 6.5% yield at today’s prices. The dividend has not grown enough at all over the last 10 years, but that’s to be expected of preferreds. Generally they pay a fixed coupon like bonds do, while enjoying priority payment above common shares.

Bank of America’s preferred shares include many attractive features, including:

• An option to convert to common stock at $50.

• Perpetual payment.

• Non-callable (i.e. management cannot go behind your back and retire the bond on you).

The conversion option is particularly promising. If BAC ever goes above $50–and it’s been there before–investors will be able to “pay” just $55 per share to buy a stock that costs much more.

Bank of America is a pretty solid business overall. It scores an A+ on profitability in Seeking Alpha Quant, with a 31% net margin and a 12% return on equity. Its earnings grew 8.6% in the trailing 12 month period. Its balance sheet is its weakest point: it’s sitting on a $100 billion unrealized losses. It’s not the best balance sheet among the big banks, but BAC nevertheless has very good liquidity in my view, with enough highly liquid assets to pay for 56% of deposits.

The Bottom Line

The bottom line on dividend investing in 2023 is this: it’s a good time to go shopping for yield. Rising interest rates sent investors selling dividend stocks like there was no tomorrow, resulting in many such stocks paying yields that make the 10 year treasury look like child’s play. Perhaps it made sense to sell dividend stocks at their highs for the year, but today the buying is getting good.